<PAGE> 1
Filed pursuant to Rule 424(b)(1)
Registration No. 333-11077
$20,000,000
MERIDIAN DIAGNOSTICS, INC. LOGO
7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2006
The Debentures are convertible at any time prior to maturity, unless
previously redeemed or repurchased, into shares of Common Stock, no par value,
of Meridian Diagnostics, Inc. (the "Company") at a conversion price of $16.09
per share, subject to adjustment in certain events. On September 23, 1996, the
last reported sale price of the Company's Common Stock, as reported on The
Nasdaq National Market under the symbol "KITS," was $12 7/8 per share. See
"Price Range of Common Stock."
Interest on the Debentures is payable semi-annually on March 1 and
September 1, commencing March 1, 1997, and the Debentures will mature on
September 1, 2006, unless previously redeemed. The Debentures are redeemable at
the option of the Company, at any time in whole or in part, at the redemption
prices set forth herein, plus accrued interest; provided, however, that prior to
September 1, 1999, the Debentures may not be redeemed unless 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. In
the event of a Repurchase Event (as defined), each holder of Debentures may
require the Company to repurchase the Debentures, in whole or in part, for cash,
at 101% of the principal amount thereof, plus accrued interest. The Debentures
will be unsecured general obligations of the Company subordinated to all
existing and future Senior Indebtedness (as defined). See "Description of
Debentures."
-------------------------
SEE "RISK FACTORS" ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
- ------------------------------------------------------------------------------------------------
Per Debenture................................ 100% 5.25% 94.75%
- ------------------------------------------------------------------------------------------------
Total(4)..................................... $20,000,000 $1,050,000 $18,950,000
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
<FN>
(1) Plus accrued interest, if any, from date of issuance.
(2) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(3) Before deducting expenses of the offering payable by the Company estimated
at $300,000.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
an additional $3,000,000 in principal amount of the Debentures on the same
terms and conditions to cover over-allotments, if any. If all such
additional principal amount of the Debentures is purchased, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $23,000,000, $1,207,500 and $21,792,500, respectively. See
"Underwriting".
</TABLE>
-------------------------
The Debentures are offered severally by the Underwriters, as specified
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
Debentures will be made against payment thereof on or about September 27, 1996.
-------------------------
RONEY & CO. LOGO
SEPTEMBER 24, 1996
<PAGE> 2
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Northwestern Atrium, 500 West Madison Street, Suite 1400, Chicago,
Illinois, and at 7 World Trade Center, Suite 1300, New York, New York. Copies of
such material can also be obtained, at prescribed rates, by mail from the Public
Reference Section of the Commission at its Washington, D.C. address set forth
above. In addition, material filed by the Company can be obtained and inspected
at the offices of the Nasdaq Stock Market, Inc., 9513 Key West Avenue,
Rockville, Maryland 20850, on which the Common Stock is quoted. The Company is
an electronic filer, and the Commission maintains a Web site (located at
http://www.sec.gov) that contains reports, proxy statements and other
information regarding registrants that file electronically.
This Prospectus constitutes part of a Registration Statement on Form S-3
filed by the Company with the Commission under the Securities Act of 1933 (the
"Securities Act"). This Prospectus omits certain of the information contained in
the Registration Statement, and reference is hereby made to the Registration
Statement and related exhibits for further information with respect to the
Company. Any statements contained in this Prospectus as to the terms of any
document are not necessarily complete, and in such instance reference is made to
the copy of such document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROSPECTUS INCORPORATES BY REFERENCE CERTAIN DOCUMENTS RELATING TO THE
COMPANY WHICH ARE NOT DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN THE
EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE, WITHOUT CHARGE, ON ORAL OR
WRITTEN REQUEST BY ANY PERSON TO WHOM THIS PROSPECTUS IS DELIVERED. Written or
telephone requests should be directed to Gerard Blain, Vice President, Secretary
and Chief Financial Officer, 3471 River Hills Drive, Cincinnati, Ohio 45244,
telephone (513) 271-3700. The following documents, which have been filed by the
Company with the Commission, are hereby incorporated by reference in this
Prospectus:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995;
(2) The Company's Quarterly Reports on Form 10-Q for the quarters
ended December 31, 1995, March 31, 1996 and June 30, 1996;
(3) The Company's Current Report on Form 8-K dated June 24, 1996; and
(4) The description of the Common Stock contained in the Registration
Statement on Form 8-A filed on August 15, 1986 and amended August 20, 1986.
All documents filed by Meridian Diagnostics, Inc. pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of this
Offering shall be deemed to be incorporated by reference in this Prospectus. Any
statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
The Company owns the following trademarks: CALAS(R), FiltraCheck-UTI(R),
ImmunoCard(TM), Merifluor(R), Meritec(TM), MeriStar(R), Macro-Con(R),
MONOLERT(R), MONOSPOT(R), ECOFIX(R), HYDROFLUOR(R), Cytoclone(R), Rotaclone(R),
Adenoclone(R) and Para-Pak(R).
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Company's Financial Statements and
Notes thereto, appearing elsewhere in or incorporated by reference into this
Prospectus. Unless otherwise indicated, information in this Prospectus relating
to share data reflects 3-for-2 stock splits effective March 27, 1992 and October
2, 1995, 3% stock dividends effective December 23, 1993 and December 8, 1994 and
a 5% stock dividend effective December 14, 1992 and assumes that the
Underwriters' over-allotment option is not exercised. The Company's fiscal year
ends on September 30. See "Glossary of Selected Terms" for definitions of
certain terms used herein.
THE COMPANY
Meridian Diagnostics, Inc. develops, manufactures and markets a diverse
line of disposable diagnostic test kits and related diagnostic products used for
the rapid diagnosis of infectious diseases. The Company's products aid in the
diagnosis of such common medical conditions as gastrointestinal infections,
mononucleosis, urinary tract infections and respiratory infections. The
Company's products provide accuracy, simplicity and speed, enabling healthcare
providers to reduce costs while improving quality. 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 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. Technological advances
permitting accurate diagnostic testing to occur outside the traditional hospital
or laboratory setting have affected this market. These technological advances
have contributed to the emergence of alternate site markets, such as physicians'
offices, outpatient clinics, nursing homes and health maintenance organizations
(HMOs), as important diagnostic product segments. The increasing pressures to
contain global healthcare costs have accelerated this shift to alternate site
markets and also increased the use of diagnostic tests. With rapid and accurate
diagnoses of infectious diseases, physicians can pinpoint therapies quickly,
leading to faster recovery, shorter hospital stays and reduced expense. These
technological advances should also contribute to the development of new markets,
including veterinary laboratories, water treatment facilities and consumer
self-testing in the over-the-counter market.
The Company's product line consists of over 100 diagnostic products
relating to five major disease states. The Company's diagnostic tests, which
generally range from $1 per test to $13 per test, provide rapid results (often
in minutes or hours), are easy to use and require less technical expertise than
conventional tests. Conventional diagnostic testing requires highly skilled
technicians to perform complicated test procedures that generally have
turnaround times of 24 to 48 hours. For many specific diseases, the Company has
the broadest product line or the only alternative to more expensive, time
consuming conventional procedures.
The Company's products are based on multiple core diagnostic technologies,
each of which enables 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. The Company targets niche diagnostic test markets, which
are characterized by a large number of users. Historically, the larger
diagnostic companies have not concentrated on this segment of the market.
The Company's marketing group utilizes industry contacts and key customer
focus sessions to identify new product opportunities. Through the use of
cross-functional teams that include marketing, research and development and
manufacturing personnel, the marketing group guides the development process to
meet customers' needs with products that are easier to use, require less
technical expertise and yield faster results. The Company believes it is well
positioned to develop partnerships with key customers 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 customers. To illustrate, in January
1996, the Company signed a three-year exclusive agreement, with the Columbia/HCA
Healthcare Corporation, a hospital alliance of approximately 350 hospitals, for
all parasitology transport products and specific infectious disease diagnostic
products. In April 1996, the Company signed a three-year, primary source
agreement with Laboratory Corporation of America, consisting of over 35
laboratories, for the supply of certain products for parasitology, virology and
other infectious diseases.
3
<PAGE> 4
The Company's research and development activities focus on developing
diagnostic solutions. Over the past five years, the Company has developed
internally 19 new products. The Company believes that its ability to bind
various chemicals to various solid phases, including plastics, membranes, latex
beads and immunofluorescent dyes to develop testing formats, gives it a
competitive advantage. The Company estimates that, from the conceptualization of
a product, it takes approximately 18 to 24 months to begin to generate revenues.
The Company markets its products through a direct sales force, in the U.S.
and Italy, supplemented by a network of U.S. and international distributors.
Over the last three years, the Company's international sales have nearly tripled
from $2.1 million in fiscal 1992 to $5.8 million in fiscal 1995 and represented
27% of net sales for the nine months ended June 30, 1996.
The Company has developed and implemented a strategy for growth consisting
of the following six principal elements:
- Developing New Product Applications from Core Technologies and Formats
- Acquiring and Licensing Products and Technology
- Increasing International Sales
- Developing Partnerships with Consolidated Healthcare Organizations
- Entering New Markets
- Accessing Alternate Site Markets for Diagnostic Testing
Since 1990, the Company has realized substantial growth in net sales and
primary net earnings per share. Net sales increased to $25.1 million in fiscal
1995 from $8.5 million in fiscal 1990, a compound annual growth rate of
approximately 24%. Over the same period, primary earnings per share increased at
a compound annual growth rate of approximately 37%.
On June 24, 1996, the Company acquired the enteric product line of
Cambridge Biotech Corporation. The diagnostic products identify Adenovirus,
Rotavirus, C. difficile and Lyme disease. The current sales volume of the
acquired products is approximately $4 million annually.
The Company is an Ohio corporation, its principal executive offices are
located at 3471 River Hills Drive, Cincinnati, Ohio 45244, and its telephone
number is (513) 271-3700.
THE OFFERING
Securities Offered......... $20,000,000 ($23,000,000 if the Underwriters'
over-allotment option is exercised in full)
principal amount of 7% Convertible Subordinated
Debentures due September 1, 2006 (the
"Debentures").
Payment of Interest........ Semi-annually on each March 1 and September 1,
commencing March 1, 1997, with interest accruing
from the date of issuance.
Conversion Rights.......... The Debentures are convertible into shares of the
Company's Common Stock, no par value (the "Common
Stock") at any time prior to maturity, unless
previously redeemed or repurchased, at a conversion
price of $16.09 per share, subject to adjustment in
certain events as described herein. Accordingly,
each $1,000 principal amount of Debentures is
convertible into 62 shares of Common Stock, subject
to adjustment, for an aggregate of 1,243,008
shares, representing approximately 7.6% of the
Common Stock on a fully diluted basis. See
"Capitalization."
Optional Redemption........ Redeemable at the Company's option, at any time in
whole or in part, at the redemption prices set
forth herein, plus accrued interest; provided,
however, that prior to September 1, 1999, the
Debentures may not be redeemed unless the closing
sale 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 notice of redemption.
4
<PAGE> 5
Repurchase at Option of
Holders Upon Certain
Events................... Upon a Repurchase Event (as defined), the Company
is required to repurchase, at the option of
holders, any Debentures delivered to it for
redemption at 101% of the principal amount thereof,
plus accrued interest. A Repurchase Event is
generally defined to include: (i) certain
acquisitions of Company voting stock such that a
person (other than a present holder of 5% or more
of Company capital stock) owns more than 50% of the
outstanding Company voting stock; (ii) a change in
the composition of the Board of Directors such that
there is a shift of a majority of the members
thereof; (iii) certain consolidations, mergers or
sales of assets of the Company the effect of which
is that a person (other than a present holder of 5%
or more of Company capital stock) owns more than
50% of the outstanding Company capital stock; (iv)
the acquisition by the Company of more than 30% of
its outstanding shares of capital stock in any
12-month period; and (v) certain Company
acquisitions and distributions in respect of its
capital stock in excess of 30% of the value of such
stock. See "Description of Debentures -- Repurchase
Event."
Subordination.............. The Debentures will be subordinated to all existing
and future Senior Indebtedness (as defined) of the
Company. There is no limitation on the amount of
Senior Indebtedness that may be incurred by the
Company.
Use of Proceeds............ Possible acquisitions and licensing of products or
technologies and general corporate purposes.
Common Stock Outstanding... 14,277,509 shares.(1)
Common Stock Traded........ Nasdaq National Market System (KITS)
- ---------------
(1) Does not include 780,952 shares of Common Stock issuable upon the exercise
of outstanding stock options.
5
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Net sales..................... $11,085 $14,003 $16,171 $21,877 $25,110 $18,357 $20,336
Gross profit.................. 7,112 9,421 11,073 14,359 17,101 12,277 14,139
Operating income.............. 1,356 2,616 3,525 4,814 6,576 4,520 5,590
Earnings before income
taxes...................... 1,518 2,605 3,101 3,983 5,960 4,037 5,862
Net earnings.................. 959 1,653 1,889 2,441 3,524 2,361 3,483
Primary earnings per common
share...................... 0.08 0.13 0.15 0.20 0.29 0.19 0.25
Dividends paid per common
share
Regular.................... 0.02 0.04 0.06 0.08 0.10 0.08 0.10
Special.................... 0.02(1) 0.01(1) --(1) --(1) -- -- 0.03
Primary weighted average
number of common shares
outstanding................ 12,129 12,222 12,264 12,277 12,355 12,313 14,137(2)
Fully diluted earnings per
common share............... -- -- -- -- $ 0.28 -- $ 0.24
Fully diluted weighted average
number of common shares.... -- -- -- -- 14,542 -- 14,794
Ratio of earnings to fixed
charges(3)................. 43.3x 25.8x 16.9x 4.6x 6.2x 5.7x 19.9x
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
BALANCE SHEET DATA
Cash and short-term investments.................................... $ 7,972 $ 26,622
Working capital.................................................... 9,574 28,224
Total assets....................................................... 41,602 61,602
Long-term debt, including current maturities....................... 2,812 22,812
Shareholders' equity............................................... 28,202 28,202
<FN>
- ---------------
(1) The Company paid a special 5% stock dividend in fiscal 1992 and special 3%
stock dividends in fiscal 1993 and fiscal 1994. See "Dividend Policy."
(2) Reflects conversion of the Company's 7 1/4% Convertible Subordinated
Debentures into shares of Common Stock.
(3) The ratio of earnings to fixed charges were computed by dividing earnings by
fixed charges. For this purpose, "earnings" consist of earnings before
income taxes and "fixed charges," and "fixed charges" consist of interest
on indebtedness and the portion of rental expense which is deemed to be
representative of the interest component.
</TABLE>
(4) Adjusted to give effect to the sale of the Debentures and the application of
the estimated net proceeds therefrom. See "Use of Proceeds."
6
<PAGE> 7
RISK FACTORS
Prospective investors should carefully consider the factors set forth
below, as well as other information included elsewhere herein or incorporated
herein by reference, prior to purchasing the Debentures offered hereby.
IMPACT OF ACQUISITIONS
Although additional acquisitions may enhance the opportunity to increase
net earnings over time, such acquisitions could result in greater administrative
burdens, increased exposure to the uncertainties inherent in marketing new
products, financial risks of additional operating costs and additional interest
costs. The principal benefits expected to result from any acquisitions made by
the Company will not be achieved fully unless the operations of the acquired
entities are successfully integrated with those of the Company. There can be no
assurance that the Company will be able to conclude any acquisition in the
future on terms favorable to it.
In June 1996, the Company acquired the enteric product line of Cambridge
Biotech Corporation. The Company's results of operations could be adversely
affected if the integration of this product line is not successfully completed.
See "Business -- Acquisition Overview." In addition, gross profit as a
percentage of net sales for the fiscal quarter and fiscal year ending September
30, 1996 and for fiscal 1997 is expected to decline modestly as a result of the
acquisition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
NEW PRODUCT DEVELOPMENT AND ACQUISITIONS
The diagnostic test industry is characterized by ongoing technological
developments and changing customer requirements. As a result, the Company's
success and continued growth depend, in part, on its ability in a timely manner
to develop or acquire rights to, and successfully introduce into the
marketplace, enhancements of existing products or new products that incorporate
technological advances, meet customer requirements and respond to products
developed by the Company's competition. There can be no assurance that the
Company will be successful in developing or acquiring such rights to products on
a timely basis or that such products will adequately address the changing needs
of the marketplace. See "Business -- Strategy," "-- Products," "-- Marketing and
Sales" and "-- Research and Development."
INTERNATIONAL OPERATIONS
Approximately 23% of the Company's net sales for fiscal 1995 and
approximately 27% through the nine months ended June 30, 1996 were attributable
to international sales, primarily in Western Europe. Although the majority of
the Company's international sales have been made in U.S. dollars, the Company is
subject to the risks associated with fluctuations in currency exchange rates.
The Company is also subject to other risks associated with international
operations, including tariff regulations, requirements for export licenses and
medical licensing and approval requirements. See "Business -- Strategy."
CHANGING MARKET CONDITIONS
The healthcare industry is in transition with a number of changes that
affect the market for diagnostic test products. Changes in the healthcare
delivery system have resulted in major consolidation among reference
laboratories and in the formation of multi-hospital alliances, reducing the
number of institutional customers for diagnostic test products. There can be no
assurance that the Company will be able to enter into and/or sustain contractual
or other marketing or distribution arrangements on a satisfactory commercial
basis with these institutional customers. See "Business -- Market Trends."
COMPETITION
The market for the Company's products is characterized by substantial
competition and rapid change. Hundreds of companies in the United States supply
immunodiagnostic tests. These companies range from multinational healthcare
entities, for which immunodiagnostics is one line of business, to small start-up
companies. Many of the Company's competitors have significantly greater
financial, technical, manufacturing and marketing resources than the Company.
See "Business -- Competition."
7
<PAGE> 8
DEPENDENCE ON KEY DISTRIBUTORS
The Company's sales to two of its distributors were approximately $8.6
million, or approximately 34% of total sales, in fiscal 1995. These distributors
resell the Company's products and other laboratory products to end-user
customers. The loss of either of these distributors could have a material
adverse effect on the Company's sales and results of operations. See
"Business -- Marketing and Sales" and "-- Customers."
ABSENCE OF FINANCIAL COVENANTS
The Indenture does not contain any financial performance covenants.
Consequently, the Company is not required under the Indenture to meet any
financial tests such as those that measure the Company's working capital,
interest coverage, fixed charge coverage or net worth in order to maintain
compliance with the terms of the Indenture.
SUBORDINATION
The Debentures will be subordinated to all current and future Senior
Indebtedness (as defined) of the Company. There are no restrictions in the
Indenture on the incurrence of additional Senior Indebtedness. By reason of such
subordination, in the event of any insolvency, receivership, liquidation or
other reorganization of the Company, holders of Senior Indebtedness must be paid
in full before the holders of the Debentures may be paid. Accordingly, there may
be insufficient assets remaining after payment of prior claims to pay amounts
due on the Debentures.
GOVERNMENT REGULATION
The Company's products generally require governmental clearance before
marketing in the U.S. and in certain foreign countries. The Company may be
required to submit test data from clinical trials to establish "substantial
equivalence" of its products with previously approved products. If so required,
the Company may commence marketing in the U.S. only when the regulatory agency
issues a written order finding such "substantial equivalence," which may take
longer than the 90-to 120-day period estimated for such review. Any product for
which "substantial equivalence" cannot be established must proceed through the
more lengthy pre-market approval procedures. There is no assurance that the
Company will be able to obtain the necessary clearances or timely clearances to
market future products. See "Business -- Government Regulation."
Third party payors (including state and federal governments) are
increasingly concerned about escalating health care costs and can indirectly
affect the pricing or the relative attractiveness of the Company's products by
regulating the maximum amount of reimbursement they will provide for diagnostic
testing services. If reimbursement amounts for diagnostic testing services are
decreased in the future, such decreases may reduce the amount that will be
reimbursed to hospitals or physicians for such services and consequently could
reduce the price the Company can charge for its products.
In recent years, the federal government has been examining the nation's
health care system from numerous standpoints, including the cost of and access
to health care and health insurance. Proposals impacting the health care system
are constantly under consideration and could be adopted at any time. It is
unclear what effect the enactment of such proposals would have on the Company.
COMMON STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
The Company's officers, directors, principal shareholders and their
affiliates beneficially own approximately 38% of the Company's outstanding
Common Stock, all of which shares are eligible for sale under Securities and
Exchange Commission Rule 144 under the Securities Act of 1933. As a result,
these shareholders, if they were to act in concert, would have the ability to
influence significantly most matters requiring approval by shareholders of the
Company, including the election of a majority of the directors. In addition, the
Board of Directors has the authority to issue up to 1,000,000 shares of
undesignated preferred stock and to determine the rights, preferences,
privileges and restrictions, including voting rights, of such shares without any
future vote or action by the shareholders. The voting power of these principal
shareholders, officers and directors or the issuance of preferred stock under
certain circumstances could have the effect of delaying or preventing a change
in control of the Company. Ohio corporation law contains provisions that may
8
<PAGE> 9
discourage takeover bids for the Company that have not been negotiated with the
Board of Directors. Such provisions could limit the price that investors might
be willing to pay in the future for shares of the Common Stock. In addition,
sales of substantial amounts of such shares in the public market could adversely
affect the market price of the Common Stock and the Company's ability to raise
additional capital at a price favorable to the Company. See "Description of
Capital Stock."
NO ASSURANCE OF A PUBLIC MARKET
No assurance can be given that an active market for the Debentures will
develop or, if developed, will continue. If no active market develops, it may be
difficult for purchasers to resell their Debentures. The representative for the
Underwriters has advised the Company that it intends to make a market for the
Debentures although it is under no obligation to continue to do so and were such
market making to be discontinued, investors would encounter difficulty effecting
purchase or sale transactions in the absence of alternative market makers. See
"Underwriting."
9
<PAGE> 10
CAPITALIZATION
The table sets forth the capitalization of the Company at June 30, 1996 and
as adjusted to give effect to the issuance and sale of the Debentures offered
hereby and the proposed application of the estimated net proceeds therefrom. See
"Use of Proceeds." The table should be read in conjunction with the Company's
Consolidated Financial Statements and related notes thereto appearing elsewhere
in this Prospectus or incorporated herein by reference.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
Long-term debt, including current maturities(1)........................ $ 2,812 $22,812
------- -----------
Shareholders' equity:
Preferred stock, without par value; 1,000,000 shares authorized, none
issued............................................................ -- --
Common stock, without par value; 50,000,000 shares authorized,
14,276,638 shares outstanding(2).................................. 2,385 2,385
Additional paid-in capital........................................... 20,498 20,498
Retained earnings.................................................... 5,501 5,501
Foreign currency translation adjustment.............................. (182) (182)
------- -----------
Total shareholders' equity........................................ 28,202 28,202
------- -----------
Total capitalization......................................... $31,014 $51,014
======= ===========
<FN>
- ---------------
(1) The Company has an unused $10,000,000 line of credit with a commercial bank.
(2) As of June 30, 1996, options to acquire 782,735 shares of Common Stock were
outstanding.
</TABLE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Debentures offered hereby are estimated to be $18,650,000 ($21,492,500 if the
Underwriter's over-allotment option granted by the Company is exercised in full)
after deducting underwriting discounts and commissions and estimated offering
expenses.
Historically, the Company has aggressively pursued the acquisition and
licensing of products and technologies. In recent years, the Company has
acquired the infectious disease and mononucleosis diagnostic product lines from
Johnson & Johnson, for $3.45 million and $3.38 million, respectively, and in
June 1996, the enteric product line of Cambridge Biotech Corporation for $6.6
million (including inventories and transaction expenses). See
"Business -- Acquisition Overview." The Company has also made smaller product
acquisitions and entered into a number of licensing arrangements. The Company
intends to use the net proceeds from the sale of the Debentures to continue to
seek acquisitions of products and product lines and the licensing of new
products, some of which transactions could be larger than those previously
consummated. The Company currently has no understandings, commitments or
agreements with respect to any such acquisitions or licensing arrangements, and
there can be no assurance as to the timing of any such acquisitions or licensing
arrangements or that any such acquisitions or licensing arrangements will be
made. In addition, net proceeds may be used for general corporate purposes.
Pending their use, the proceeds will be placed in short-term, interest-bearing
securities, certificates of deposit or direct or guaranteed obligations of the
United States of America.
10
<PAGE> 11
DIVIDEND POLICY
The Company follows a cash dividend policy consisting of regular quarterly
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 to
$0.035 per share. The third of such dividends was paid on August 13, 1996.
The Company paid a $0.02 per share cash dividend in the first quarter of
fiscal 1995 and paid $0.0267 per share cash dividends for each other quarter of
fiscal 1995. In addition, the Company declared and paid a three-for-two stock
split payable on October 2, 1995. On December 1, 1995, the Company paid a
special fiscal 1995 year-end dividend of $0.025 per share.
The Company paid a $0.016 per share cash dividend in the first quarter of
fiscal 1994 and $0.02 per share cash dividends for each other quarter of fiscal
1994. In addition, the Company declared and paid a special fiscal 1994 year-end
dividend in the form of a 3% stock dividend effective December 1, 1993.
11
<PAGE> 12
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
"KITS." The following table sets forth, for the fiscal periods indicated, the
high and low closing sales prices for the Common Stock as reported on the Nasdaq
National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1994
First Quarter............................................................. $6 1/2 $5 1/4
Second Quarter............................................................ 7 1/8 5 1/2
Third Quarter............................................................. 6 1/8 5
Fourth Quarter............................................................ 5 1/2 4 3/8
FISCAL YEAR ENDED SEPTEMBER 30, 1995
First Quarter............................................................. 5 4 3/8
Second Quarter............................................................ 6 1/2 4 5/8
Third Quarter............................................................. 7 3/8 5 7/8
Fourth Quarter............................................................ 9 1/2 6
FISCAL YEAR ENDED SEPTEMBER 30, 1996
First Quarter............................................................. 12 1/4 7 3/4
Second Quarter............................................................ 11 3/8 9 1/8
Third Quarter............................................................. 15 5/16 9 1/8
Fourth Quarter (through September 23)..................................... 15 10 3/4
</TABLE>
On September 23, 1996, the last reported sales price for the Common Stock
on the Nasdaq National Market was $12 7/8 per share. As of June 30, 1996, there
were approximately 850 holders of record of the Common Stock, which the Company
believes represents a total of approximately 6,000 beneficial shareholders.
12
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth the Company's selected historical
consolidated financial data for the fiscal years 1991 through 1995 and for the
nine months ended June 30, 1995 and 1996. The selected consolidated financial
data for the five fiscal years in the period ended September 30, 1995 are
derived from the financial statements of the Company which have been audited by
Arthur Andersen LLP. The selected financial data for the nine months ended June
30, 1995 and 1996 are derived from the Company's unaudited quarterly financial
statements. In the opinion of management, the nine month financial data reflect
all adjustments necessary for a fair presentation of such data. The results for
the first nine months of fiscal 1996 are not necessarily indicative of the
results to be expected for the full year. The information below should be read
in conjunction with the Consolidated Financial Statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Net sales............................... $11,085 $14,003 $16,171 $21,877 $25,110 $18,357 $20,336
Cost of sales........................... 3,973 4,582 5,098 7,518 8,009 6,079 6,196
------- ------- ------- ------- ------- ------- -------
Gross profit..................... 7,112 9,421 11,073 14,359 17,101 12,277 14,139
------- ------- ------- ------- ------- ------- -------
Research and development................ 1,102 1,157 1,165 1,433 1,432 1,083 1,106
Selling and marketing................... 2,564 3,166 3,716 4,747 5,229 3,824 4,379
General and administration.............. 2,090 2,482 2,667 3,365 3,864 2,850 3,065
------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 5,756 6,805 7,548 9,545 10,525 7,757 8,549
------- ------- ------- ------- ------- ------- -------
Operating income................. 1,356 2,616 3,525 4,814 6,576 4,520 5,590
Net interest (expense) income........... 135 (39) (122) (839) (699) (550) 32
Other (expense) income.................. 27 28 (302) 8 83 67 240
------- ------- ------- ------- ------- ------- -------
Earnings before income taxes..... 1,518 2,605 3,101 3,983 5,960 4,037 5,862
Income taxes............................ 559 952 1,212 1,542 2,436 1,676 2,378
------- ------- ------- ------- ------- ------- -------
Net earnings..................... $ 959 $ 1,653 $ 1,889 $ 2,441 $ 3,524 $ 2,361 $ 3,483
======= ======= ======= ======= ======= ======= =======
Primary earnings per common share....... $ 0.08 $ 0.13 $ 0.15 $ 0.20 $ 0.29 $ 0.19 $ 0.25
Dividends paid per common share
Regular............................... 0.02 0.04 0.06 0.08 0.10 0.08 0.10
Special............................... 0.02 0.01 -- -- -- -- 0.03
Primary weighted average
number of common shares outstanding... 12,129 12,222 12,264 12,277 12,355 12,313 14,137(1)
Fully diluted earnings per common
share................................. -- -- -- -- $ 0.28 $ -- $ 0.24
Fully diluted weighted average number of
common shares......................... -- -- -- -- 14,542 -- 14,794
Ratio of earnings to fixed charges(2)... 43.3x 25.8x 16.9x 4.6x 6.2x 5.7x 19.9x
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
SEPTEMBER 30, -----------------
----------------------------------------------- AS
1991 1992 1993 1994 1995 ACTUAL ADJUSTED(3)
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and short-term
investments........................... $ 1,590 $ 1,810 $ 9,476 $ 8,832 $ 8,919 $ 7,972 $26,622
Working capital......................... 4,046 5,164 13,759 13,000 15,826 9,574 28,224
Total assets............................ 10,997 14,099 26,247 32,329 34,569 41,602 61,602
Long-term debt, including current
maturities............................ 99 1,808 12,812 15,051 12,881 2,812 22,812
Shareholders' equity.................... 9,519 10,676 11,617 13,232 18,878 28,202 28,202
---------------
<FN>
(1) Reflects conversion of the Company's 7 1/4% Convertible Subordinated
Debentures into shares of Common Stock.
(2) The ratio of earnings to fixed charges were computed by dividing earnings by
fixed charges. For this purpose, "earnings" consist of earnings before
income taxes and "fixed charges," and "fixed charges" consist of interest on
indebtedness and the portion of rental expense which is deemed to be
representative of the interest component.
(3) Adjusted to give effect to the sale of the Debentures and the application of
the estimated net proceeds therefrom. See "Use of Proceeds."
</TABLE>
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto appearing
elsewhere in this Prospectus or incorporated herein by reference.
GENERAL
Since its founding in 1976, the Company has evolved into a fully integrated
medical diagnostic company with a diverse product line, an established
distribution network and a highly focused product development effort. Since
1991, the Company has realized substantial growth in net sales and net earnings,
primarily as the result of developing, licensing, acquiring or entering into
supply agreements for new products, improving these products, expanding
international sales and realizing operating efficiencies.
The Company utilizes its core technologies to develop and offer products
that aid in the diagnosis of various disease states. The Company's current
product line consists of nearly 100 medical diagnostic products which test for
specific diseases within five major disease states. The product lines which have
the largest impact on Company sales are used for the collection, transportation
and concentration of parasites, and products used to diagnose C. difficile and
certain viral and respiratory diseases. See "Business-Products."
On October 10, 1995, the Company called for the redemption of the
outstanding balance of its 7 1/4% Convertible Subordinated Debentures due in
2001. At that time, approximately $7,400,000 of the principal amount of such
Debentures was outstanding. 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.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
------------------------- -----------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................... 31.5 34.4 31.9 33.1 30.5
----- ----- ----- ----- -----
Gross profit........................... 68.5 65.6 68.1 66.9 69.5
----- ----- ----- ----- -----
Research and development......................... 7.2 6.5 5.7 5.9 5.4
Selling and marketing............................ 23.0 21.7 20.8 20.8 21.5
General and administrative....................... 16.5 15.4 15.4 15.5 15.1
----- ----- ----- ----- -----
Total operating expenses............... 46.7 43.6 41.9 42.2 42.0
----- ----- ----- ----- -----
Operating income....................... 21.8 22.0 26.2 24.7 27.5
Net interest (expense) income.................... (0.8) (3.8) (2.8) (3.0) 0.2
Other expense (income)........................... (1.8) -- 0.3 0.3 1.1
----- ----- ----- ----- -----
Earnings before income taxes........... 19.2 18.2 23.7 22.0 28.8
Income taxes..................................... 7.5 7.0 9.7 9.1 11.7
----- ----- ----- ----- -----
Net earnings........................... 11.7% 11.2% 14.0% 12.9% 17.1%
===== ===== ===== ===== =====
</TABLE>
Comparison of Nine Months ended June 30, 1996 and 1995
Net sales increased $1,979,000, or 11%, to $20,336,000 for the nine months
ended June 30, 1996. These increases stem primarily from strong unit volume
growth in the Premier, Para-Pak and ImmunoCard lines. 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 continues to be 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
$343,000 of sales volume
14
<PAGE> 15
for the nine months results. The enteric products acquired from Cambridge
Biotech Corporation on June 24, 1996 contributed $47,000.
OEM sales, consisting of products sold to Johnson & Johnson,
Carter-Wallace, Inc. and Becton, Dickinson and Company, were down for the nine
months approximately $270,000 which is largely a result of timing of orders.
Also, offsetting the above increases for the nine months period are sales of the
mononucleosis line, down about 10%. This decline is attributable to the
wind-down of production of the MONOSPOT product, previously supplied by Ortho
Diagnostics Systems, Inc. and the transition to the Company-produced new
mononucleosis latex products.
Following is a summary of the increase in sales broken down by volume,
price and currency:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, 1996
---------------------
$ CHANGE % CHANGE
---------- --------
<S> <C> <C>
Volume............................................. $1,704,000 9.3%
Price.............................................. 99,000 0.5
Currency........................................... 176,000 1.0
---------- ----
Total.............................................. $1,979,000 10.8%
========== ====
</TABLE>
European sales increased from $3,829,000 to $4,811,000, or 26%, for the
nine month period principally from volume growth in the Premier line and the new
volume from the Inova line, ImmunoCard and Para-Pak formats.
The increase in sales broken down by volume, price and currency for
European sales are summarized below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, 1996
-------------------
$ CHANGE % CHANGE
-------- --------
<S> <C> <C>
Volume.............................................. $855,000 22.3%
Price............................................... (49,000) (1.3)
Currency............................................ 176,000 4.6
-------- ----
Total............................................... $982,000 25.6%
======== ====
</TABLE>
Gross profit as a percentage of net sales improved to 69.5% for the
nine-month period, up over two and one half points for the nine months compared
to the prior year. Product mix, driven by growth in excess of 17% for Premier
and 27% for ImmunoCard coupled with a decrease in lower margin OEM sales were
the primary factors accounting for the improvement. In addition, the 9% increase
in volume and reduced scrap and depreciation expenses were also contributing
factors to the improved margin.
Gross profit as a percentage of net sales for the fiscal quarter and fiscal
year ending September 30, 1996 and for the fiscal year ending September 30, 1997
is expected to decline modestly as a result of the acquisition of the enteric
product line of Cambridge Biotech Corporation. See "Business -- Acquisition
Overview." Under the purchase agreement, the Company will purchase approximately
one year of inventory at a negotiated cost that is expected to be higher than
the Company's cost of manufacturing once the purchased product line is fully
integrated into its manufacturing facilities in Cincinnati. Also, certain
additional acquisition costs will be amortized, further diluting the gross
profit percentage.
Total operating expenses increased $792,000 or 10% for the nine months
ended June 30, 1996, compared to the prior year. Total operating expenses were
42.0% of net sales for the nine months, down 0.2 percentage points.
Research and development expenses increased $22,000, or 2%, for the
nine-month period. Increases in personnel costs associated with initial
development work on the Premier EHEC in food and agricultural applications plus
development of H. pylori antigen in stool were offset in part by lower clinical
trial expense.
15
<PAGE> 16
Selling and marketing expenses increased 15% for the nine months. The
increases are attributable to personnel costs in the U.S. associated with the
addition of a third sales region and in Europe from added personnel in the sales
support and product management functions. Other significant increases included
expenses for an expanded international distributors' meeting in Cincinnati,
depreciation expense associated with the new U.S. headquarters facility and the
impact of exchange from the stronger Lira versus the dollar.
General and administrative expenses increased approximately 8% for the nine
month period. Personnel costs in the U.S. and in Europe, outside services
associated with computer information systems, facility expenses related to the
new administrative headquarters, the impact of exchange from the stronger Lira
and higher international travel are the primary reasons for the increase. In
addition to these increases, the one time state filing fee for the increase in
the number of the Company's authorized shares of common stock accounted for the
nine months increase.
Operating income, as a result of the above, increased $1,070,000, or 24%
compared to the sales increase of 11% for the nine month period last year. As a
percent of sales, operating income improved almost three points for the nine
months.
Other income (net) increased $755,000 for the nine month period ended June
30, 1996. Interest income (net) improved $582,000 for the nine month period
primarily from the reduction in interest expense as a result of the conversion
of the convertible debentures issued by the Company in 1993 as of November 30,
1995. Included in the nine 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 Ortho Diagnostic Systems, Inc. Gains/losses in foreign exchange
for the nine month period were not material. The cumulative foreign currency
translation adjustment increased by $71,000 during the nine month period as a
result of the Lira strengthening against the U.S. dollar.
The Company's effective tax rate is down approximately 1% for the nine
month period compared to the prior year.
Net earnings increased $1,123,000, or 48% to $3,483,000 from $2,361,000 for
the nine months ended June 30, 1996 compared to the prior year. The
corresponding increase in primary earnings per share for the comparable periods
was approximately 32%. The lower growth rates in earnings per share results from
the increase in outstanding shares associated with the conversion of the
convertible debentures issued by the Company in 1993. Through the first nine
months of fiscal 1996, primary earnings per share are $0.25, or 86% of the full
1995 fiscal year earnings of $0.29. Fully diluted earnings per share, applicable
only to the 1996 nine month period, include the impact of outstanding stock
options.
Comparison of Fiscal Years ended September 30, 1995 and 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 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
Ortho Diagnostics Systems, Inc. (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.
Gross profit increased $2,742,000, or 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
16
<PAGE> 17
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. 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.
Comparison of Fiscal Years ended September 30, 1994 and 1993
Net sales increased $5,706,000, or 35%, to $21,877,000 in fiscal 1994 from
$16,171,000 in fiscal 1993. This increase resulted primarily from higher unit
volumes resulting from the June 1993 acquisition of the infectious mononucleosis
product line and the January 1994 acquisition of the infectious disease product
line from ODSI, plus strong unit growth in the ImmunoCard and Merifluor product
lines.
The increase in sales of $5,706,000 was comprised of volume of $5,139,000,
or 32%, price of $899,000, or 5%, offset by currency of ($332,000) or (2%).
European sales increased $1,447,000, or 58%, to $3,927,000 from $2,480,000
largely due to MONOSPOT and MONOLERT products acquired from ODSI in June 1993,
plus unit growth in the Para-Pak, Merifluor and Premier product lines. This
increase in net sales was attributed to volume of $1,114,000, or 45%, price of
$665,000, or 27%, offset by currency of ($332,000), or (14%). The increase from
pricing stemmed from the expiration in fiscal 1994 of contract supply prices in
effect at the time of the mononucleosis product line acquisition in fiscal 1993.
Gross profit increased $3,286,000, or 30%, to $14,359,000 for the year,
from $11,073,000 in fiscal 1993. As a percentage of sales, gross profit declined
to 65.6% in fiscal 1994 from 68.5% in fiscal 1993. This decline is due to
several factors including the impact of the lower margin ODSI product line
acquisitions -- in part provided under a supply agreement -- which ended June
30, 1994, except for MONOSPOT which ended in October 1995. Other factors
impacting gross profit were increased manufacturing costs, higher scrap and
obsolescence costs stemming from product development including validation
batches, minor product discontinuations and additional costs associated with
packaging standardization. Also impacting manufacturing cost
17
<PAGE> 18
was the transfer and integration of the ODSI infectious disease product line
into Meridian's facilities in Cincinnati.
Operating expenses increased $1,997,000, or 26%, to $9,545,000 for fiscal
1994 from $7,548,000 in fiscal 1993, but declined as a percentage of sales to
43.6% in fiscal 1994 from 46.7% in fiscal 1993. Research and development expense
increased $268,000, or 23%, over fiscal 1993 primarily from higher personnel
costs, increased clinical trial activity and laboratory supplies associated with
new product development and depreciation expense stemming from equipment
acquired during the year from ODSI. Selling and marketing expenses increased
$1,031,000, or 28%, primarily as a result of the amortization of the purchase
price of the ODSI product line acquisitions, higher personnel costs in the U.S.
and Europe from the addition of sales representatives and higher promotional
expenses in the U.S. associated with new products and, in Europe, from the
expansion of the direct sales and distribution to customers in Italy. General
and administrative expenses increased $698,000, or 26%, due to amortization of
the ODSI acquisitions, increased personnel costs in the U.S. and Europe to
support the continued growth in the business, higher depreciation expense
related to equipment acquired from ODSI plus an increase in the provision for
potential doubtful accounts.
Operating income as a result of the above increased $1,289,000, or 37%, to
$4,814,000 in fiscal 1994 from $3,525,000 in fiscal 1993.
Other expense increased in fiscal 1994 by $406,000, which was more than
accounted for by higher interest expense and amortization of debt expenses
attributed to the $11,500,000 of 7 1/4% Convertible Subordinated Debentures
issued in September 1993. These increases in debenture-related expenses were
offset by the one time write-off of $405,000 in fiscal 1993 of expenses
associated with the Company's planned offering of Common Stock, which was
withdrawn on July 29, 1993. The after tax impact on earnings of this withdrawal
cost was $255,000 or $0.02 per share in 1993, as adjusted.
The Company's effective tax rate declined marginally for the year as a
result of a higher proportion of the income in the U.S. which is taxed at a
significantly lower rate than in Italy. The effective tax rate was 38.7% in
fiscal 1994 compared to 39.1% in fiscal 1993. Effective October 1, 1993 the
Company adopted Financial Accounting Standards Statement No. 109, "Accounting
for Income Taxes." Prior period financial statements have not been restated to
reflect the new accounting method since the cumulative effect of this change as
well as the effect of this new standard on income tax expense for fiscal 1994
was not material.
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected unaudited consolidated quarterly
results of operations of the Company for fiscal 1994, fiscal 1995 and the first
three quarters of fiscal 1996. Historically, the fourth quarter of the fiscal
year has been the strongest. The results of operations for any quarter are not
necessarily indicative of results for any future period. Quarterly earnings per
share do not necessarily total to year-end amounts due to rounding.
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1995 FISCAL 1996
------------------------------------ ------------------------------------ --------------------------
DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------- -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $3,625 $5,891 $5,717 $6,644 $5,106 $6,469 $6,782 $6,753 $5,522 $7,255 $7,559
Net earnings.......... 200 610 603 1,028 430 945 985 1,164 629 1,355 1,499
Primary earnings per
common share........ .01 .05 .05 .09 .04 .08 .08 .09 .05 .10 .11
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
On June 24, 1996, the Company acquired the enteric product line of
Cambridge Biotech Corporation for a cash payment of $6,588,000. 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
$5,358,000. This acquisition was funded by proceeds of a note under a line of
credit with the Company's commercial bank while short-term investments were
being liquidated. The note was paid off July 5, 1996.
At June 30, 1996, the Company had cash and short-term investments of
$7,972,000 and working capital of $9,574,000. Trade accounts receivable
increased $1,004,000, or 15%, primarily as a result of increased
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European sales which were up 26% for the nine month period versus the prior
year. Inventories increased $1,163,000 or 38% largely as a result of the
acquisition of the enteric product line of Cambridge Biotech Corporation
compared to September 30, 1995.
Net cash flow provided by operating activities was $4,697,000 for the nine
month period ended June 30, 1996, up $2,813,000 from the prior year period. This
increase resulted from accounts payable reflecting the December 1994 payment for
goods purchased from Ortho Diagnostic Systems, Inc. during fiscal 1994, the
increase in net earnings and the timing of estimated income tax payments.
On October 10, 1995, the Company called for the redemption of the
outstanding balance of its 7 1/4% Convertible Subordinated Debentures due in
2001. At that time approximately $7,400,000 of the principal amount of those
debentures was outstanding. 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 nine months ended June 30, 1996 were
$1,199,000, a decrease of $661,000 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
September 1996. The Company's anticipated total capital expenditures for fiscal
1996 are $2,200,000.
On April 16, 1996 the Company paid off the outstanding balance of its
mortgage loans reducing long-term debt by $2,418,000.
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 short-term
investments of approximately $1,600,000.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121 (Statement 121) on accounting for the impairment of long-lived
assets to be held and used. Statement 121 also establishes accounting standards
for long-lived assets that are to be disposed. Statement 121 is required to be
applied prospectively for assets to be held and used. 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 impact on its financial
position or results of operations.
In October 1995, the FASB issued Statement No. 123 (Statement 123)
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.
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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 currently 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 23% of total fiscal 1995 sales, with approximately
88% of international sales originating in Western Europe. The majority of the
remaining international sales were in Canada, Mexico and the Pacific Rim.
ACQUISITION OVERVIEW
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 infectious
disease and mononucleosis product lines from Johnson & Johnson for $3.45 million
and $3.38 million, respectively, the June 24, 1996 acquisition of the enteric
product line of Cambridge Biotech Corporation for $6.6 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 on the
Company's balance sheet. The Company intends to use the net proceeds of the
Offering to continue to seek acquisitions of products and product lines and the
licensing of new products, some of which could be larger than those previously
consummated.
June 24, 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 Meridian's fifth product in the C. difficile
market, enhancing the Company's market leadership position, and is the first
direct test available for the detection of the Toxin B. The Lyme disease
diagnostic test is a complementary product offering in the Company's parasitic
disease area.
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The Company paid Cambridge Biotech Corporation $6.6 million in cash for the
acquired product line and related rights and assets allocated to: an advance on
royalties of $200,000; inventory valued at $830,000; fixed assets valued at
$200,000 and intangibles valued at $5,358,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation." 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. and the balance in the rest of the world.
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 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. When
the antigen is difficult to detect, a test employs 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 diagnostic
products market. 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 expense. In addition, these pressures have led to a
major consolidation among reference laboratories and the formation of
multi-hospital alliances that has 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 to customer demands for
improvements in product accuracy, simplicity, speed and cost-efficiency.
The Company accomplishes this by
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monitoring existing markets, interacting closely with customers and
recognizing emerging diseases and therapies. Since 1991, the Company has
developed and introduced 19 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 24 products, five of
which were acquired in July 1996 as part of the enteric product line of
Cambridge Biotech Corporation.
- Increasing International Sales. The Company has targeted increasing
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 srl (MDE), added
management to expand its ability to serve Latin American markets and
strengthened its distribution channels into the European market. Over the
last three years, the Company's international sales have almost tripled
from $2.1 million in fiscal 1992 to $5.8 million in fiscal 1995 and
represented 23% of total consolidated sales in fiscal 1995.
- 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 well positioned to develop partnerships with key customers
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
customers. In January 1996, the Company signed a three-year exclusive
agreement with the Columbia/HCA Healthcare Corporation, a 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 Laboratory Corporation of America,
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. The Company plans to apply for approvals to
test both animals (United States Department of Agriculture (USDA)) and
food products (Association of Analytical Chemists (AOAC)) that may
contain this highly toxic organism. On September 1, 1996, the Company
will begin marketing its two tests for the detection of E. coli
contamination 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 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 it to more effectively promote 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.
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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 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.
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The Company's product line consists of approximately 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 C. difficile, viral diseases and respiratory diseases.
The Company's products generally range in list price from $1 per test to $13 per
test. A discussion of the Company's key products and their competitive advantage
is reflected in the table below:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INFECTIOUS DISEASE CATEGORY KEY PRODUCT(S) PRODUCT APPLICATION
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PARASITIC DISEASES
-- Giardiasis Para-Pak, Premier, Meritec Products for the diagnosis and collection,
-- Cryptosporidiosis Para-Pak Ultra, Para-Pak preservation, transportation and
-- Amebiasis Plus, concentration of parasites.
-- Lyme Disease Macro-Con
- ------------------------------------------------------------------------------------------------------------------
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
(C. difficile) Meritec, Cytoclone can cause 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.
- ------------------------------------------------------------------------------------------------------------------
RESPIRATORY DISEASES
-- Pneumonia (Mycoplasma ImmunoCard, MeriStar Pneumonia is the fifth leading cause of
pneumoniae) death worldwide, 20% of which is caused by
Mycoplasma pneumoniae
-- Valley Fever (Coccidioides Premier, Meritec Fungal pathogens can cause flu-like
immitis) illness and/or severe pneumonia, that are
life-threatening in AIDS and other
immuno-compromised patients.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
VIRAL DISEASES
-- Infectious Mononucleosis ImmunoCard, MONOLERT, Infectious mononucleosis, a viral disease
MONOSPOT 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) the population. Genital Herpes can be
life-threatening to newborns.
-- Cytomegalovirus Merifluor Cytomegalovirus infections are potentially
deadly in transplant procedures and among
immuno-compromised blood recipients.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
THE COMPANY'S COMPETITIVE ADVANTAGE MARKET
- ----------------------------------------------------------------------------------------------------
<S> <C>
Leading supplier of parasitology diagnostics. In October 1995, - Hospital Laboratories
introduced two new products that resulted in easier processing, - Reference Laboratories
safer handling and reduced processing time of the specimen and - Veterinary Laboratories
lower cost disposal of the transport container.
- ----------------------------------------------------------------------------------------------------
Historically, a physician-performed endoscopy, an extremely - Hospital Laboratories
uncomfortable and expensive procedure, was employed to diagnose - Reference Laboratories
gastric distress. The Company's tests allow accurate, quick - Veterinary Laboratories
diagnoses utilizing patient blood serum. The Company is the only
manufacturer to provide testing formats which accommodate both
small 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 rapid results which are critical in
preventing the spread of these highly infectious viruses.
- ----------------------------------------------------------------------------------------------------
The Company provides the broadest range of diagnostic reagents - Hospital Laboratories
for detecting respiratory diseases. The product is a rapid test - Reference Laboratories
providing results in only ten minutes. The product provides - State Health Laboratories
increased accuracy over common diagnostic methods, allowing for a - Veterinary Laboratories
safer, more effective treatment.
- ----------------------------------------------------------------------------------------------------
This product allows for rapid screening for the presence of - Hospital Laboratories
urinary tract infection. Therapy can be rapidly administered, - Reference Laboratories
often while the patient is still in the physician's office. - Physicians' Office
Laboratories
Both product formats enable rapid, accurate testing. - Consumer (pending)
- Public Health Laboratories
- ----------------------------------------------------------------------------------------------------
The Company provides a broad range of innovative technologies - Hospital Laboratories
including MONOLERT which use synthetic peptides to detect the - Reference Laboratories
virus which causes mononucleosis. - Physicians' Office
Premier HSV Plus detects both HSVI and HSVII rapidly from a Laboratories
variety of body sites. - Student Health Laboratories
Quickly detects "immediate early antigen" in a rapid, direct
fluorescence format.
- ----------------------------------------------------------------------------------------------------
</TABLE>
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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 virology specialists and 17
technical sales representatives. Where the Company utilizes distributors, the
Company nonetheless participates in selling efforts involving key customers. In
Italy, the Company's direct sales force consists of a director of sales, a
product specialist and seven technical sales representatives.
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.
RESEARCH AND DEVELOPMENT
The Company's research and development activities focus on developing
diagnostic solutions. Working in conjunction with the marketing department, the
Company's research and development department focuses its activities on
enhancements to and new applications for the Company's technologies. Over the
past five years the Company has developed internally 19 new products. The
research and development department has access to a number of diagnostic
technologies, each of which can be applied to satisfy new product specifications
that marketing has established. A critical expertise of the Company's product
development staff is its ability to bind various chemicals to various solid
phases, including plastics, membranes, latex beads and immunofluorescent dyes,
to develop testing formats. The Company believes that it has certain proprietary
know-how in these areas.
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, from the conceptualization of
a product, it takes approximately 18 to 24 months to begin to generate revenues.
The research and development department is comprised of 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 and 1995 and the nine
months
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ended June 30, 1996, the Company spent $1,433,000, $1,432,000 and $1,106,000,
respectively, on its research and development activities.
CUSTOMERS
The principal customers for the Company's products are hospitals,
commercial and reference laboratories and, to an increasing degree, 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 1995. Two distributors together accounted for
approximately 34% of the Company's fiscal 1995 sales. However, the Company does
not believe that the loss of either of these distributors would have a long-term
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 facility. All
manufacturing operations are regulated by, and in compliance with, FDA-mandated
Good Manufacturing Practices ("GMPs") 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 sources. As a result, the Company
believes it has access to sufficient raw materials for its products. Products
are generally produced for inventory and products are sold to customers out of
its finished goods inventory. The Company believes it has sufficient
manufacturing capacity for anticipated growth. Manufacturing backlog is not an
element of the Company's industry. See "-- Properties."
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, Becton, Dickinson and Company, Diagnostic
Products Corporation, QUIDEL Corporation and the Wampole Laboratories Division
of Carter-Wallace, Inc.
INTELLECTUAL PROPERTY, PATENTS AND LICENSES
In general, the Company 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 15 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
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<PAGE> 28
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.
GOVERNMENT REGULATION
FDA Regulation of Medical Devices. The Company's products are regulated by
the 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 adaptation
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 (AOAC) and the United
States Department of Agriculture (USDA) 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.
The Clinical Laboratory Improvement Act of 1988 ("CLIA 88") 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 ("HHS") 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.
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<PAGE> 29
EMPLOYEES
As of June 30, 1996, the Company had 171 full-time employees, including 52
in sales, marketing and technical support, 72 in manufacturing, 19 in research
and product development and 28 in administration and finance.
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.
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. The Company
expects to complete the renovation of its former administrative offices and
laboratory manufacturing space in September 1996.
The Company believes its manufacturing and laboratory facilities are in
compliance with all applicable rules and regulations and maintained in a manner
consistent with GMPs.
MDE conducts its operations in a two-story building in the Milan, Italy
area consisting of approximately 18,000 square feet. The Company believes these
facilities are in good condition, well maintained and suitable for MDE's
long-term operations.
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<PAGE> 30
MANAGEMENT
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of August 1, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
William J. Motto....................... 55 Chairman of the Board, Chief Executive
Officer and Director
John A. Kraeutler...................... 48 President and Chief Operating Officer
Gerard Blain........................... 56 Vice President, Secretary and Chief
Financial Officer
Christine A. Meda...................... 48 Vice President, Marketing
Ching Sui Arthur Yi, Ph.D.............. 50 Vice President, Research and
Development
Antonio A. Interno..................... 46 Vice President
James A. Buzard, Ph.D.(1)(2)........... 68 Director
Gary P. Kreider(1)(2).................. 58 Director
Robert J. Ready(1)(2).................. 56 Director
Jerry L. Ruyan......................... 50 Director
- ---------------
<FN>
(1) Audit Committee Member
(2) Compensation Committee Member
</TABLE>
William J. Motto has more than 25 years experience in the pharmaceutical
and diagnostics products industries, is a founder of the Company and has been
Chairman of the Board since March 1977. From that date until June 1986 Mr. Motto
served as President. He served as Chief Executive Officer from June 1986 until
September 1989, and assumed that title again in May 1995. Before forming the
Company, Mr. Motto served in various capacities for Wampole Laboratories, Marion
Laboratories, Inc. and Analytab Products, Inc., a division of American Home
Products Corp.
John A. Kraeutler has more than 20 years of experience in the medical
diagnostics industry and joined the Company as Executive Vice President and
Chief Operating Officer in January 1992. In July 1992, Mr. Kraeutler was named
President of the Company. Mr. Kraeutler most recently served as Vice President,
General Manager for a division of Carter-Wallace, Inc. Prior to that, he held
key marketing and technical positions with Becton, Dickinson and Company and
Organon, Inc.
Gerard Blain joined the Company as Vice President and Chief Financial
Officer on March 1, 1994. He was elected Secretary in April 1996. Prior to
joining the Company, Mr. Blain was Vice President and Controller of Marion
Merrell Dow, Inc. Mr. Blain had been with Marion Merrell Dow, Inc. and its
predecessor companies since 1966.
Christine A. Meda has 15 years of experience in the diagnostics industry
and joined the Company as Senior Director of Marketing in July 1994. In October
1995, she was appointed Vice President of Marketing. Ms. Meda served as Director
of Sales and Marketing of Diagnostic Products Corporation from 1991 until
joining the Company. During the period 1984 to 1991, she held various other
management positions in both sales and marketing at Diagnostic Products
Corporation.
Ching Sui Arthur Yi, Ph.D., has more than 17 years experience in the
diagnostics industry and has been Vice President, Research and Development of
the Company since August 1989. From May 1986 until he joined the Company, he was
Director of Product Development of Cambridge BioScience Corporation. Previously
he was a partner of BioClinical System Inc. from July 1983 to April 1986,
Manager of Research and Development, Terumo Medical Corporation From March 1982
to June 1983 and Senior Scientist of Leeco Diagnostics from August 1979 to
February 1982.
Antonio A. Interno was appointed as a Vice President in August 1991. He has
been Managing Director of MDE since February 1990. Prior to that time, he was
the marketing manager for Diagnostics International Distribution SPA, a major
Italian diagnostics distributor.
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<PAGE> 31
James A. Buzard, Ph.D., has been a Director of the Company since May 1990
and serves as Chairman of the Compensation Committee. From March 1981 until
December 1989, he was Executive Vice President of Merrell Dow Pharmaceuticals
Inc. From December 1989 until his retirement in February 1990 he was Vice
President of Marion Merrell Dow Inc. He has been a business consultant since
February 1990.
Gary P. Kreider has been a Director since 1991. For over five years Mr.
Kreider has been a Senior Partner of the Cincinnati law firm of Keating,
Muething & Klekamp, counsel to the Company.
Robert J. Ready has been a Director of the Company since May 1986 and
serves as Chairman of the Audit Committee. In 1976, Mr. Ready founded LSI
Industries, Inc., Cincinnati, Ohio, which engineers, manufactures and markets
commercial/industrial lighting and graphics products, and has served as its
President and Chairman of its Board of Directors since that time.
Jerry L. Ruyan has more than 20 years experience in the diagnostics
products and medical industries, is a founder of the Company and has been a
Director of the Company since March 1977. Currently, Mr. Ruyan's principal
occupation is investment in business ventures, primarily privately held
organizations and presently as a partner in Redwood Ventures LLC. Mr. Ruyan
served as Chief Executive Officer of the Company from July 1992 to May 1995. In
May 1995, Mr. Ruyan reduced his day-to-day involvement in the Company in order
to pursue outside interests. He relinquished the title of Chief Executive
Officer at that time and continues to serve as a Director and an employee. Mr.
Ruyan served as the President of the Company from June 1986 to July 1992. From
June 1986 through January 1992, Mr. Ruyan served as Chief Operating Officer.
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<PAGE> 32
DESCRIPTION OF DEBENTURES
The Debentures will be issued under an Indenture (the "Indenture") to be
dated as of September 1, 1996, between the Company and Star Bank, National
Association as Trustee (the "Trustee"). The Debentures will represent unsecured
general obligations of the Company, subordinate in right of payment to certain
other obligations of the Company as described under "Subordination of
Debentures" and convertible into Common Stock as described under "Conversion of
Debentures." The Debentures will be limited to $20,000,000 aggregate principal
amount ($23,000,000 if the Underwriters' over-allotment option is exercised),
will be issued in fully registered form only in denominations of $1,000 or any
integral multiple thereof and will mature on September 1, 2006.
The following statements are subject to the detailed provisions of the
Indenture and are qualified in their entirety by reference to the Indenture, a
copy of which is filed as an exhibit to the Registration Statement and is also
available for inspection at the office of the Trustee. Whenever particular
provisions of the Indenture are referred to, such provisions are incorporated by
reference as a part of the statements made, and the statements are qualified in
their entirety by such reference.
Interest at the annual rate set forth on the cover page hereof is payable
semi-annually on March 1 and September 1, commencing on March 1, 1997, to
holders of record at the close of business on the preceding February 15 and
August 15, respectively. Interest on the Debentures offered hereby will accrue
from the date of initial issuance.
Principal and premium, if any, will be paid and the Debentures may be
presented for conversion, registration of transfer, and exchange, without
service charge, at the corporate trust office of the Trustee in Cincinnati,
Ohio. Interest will be paid by checks mailed to holders of record unless other
arrangements are made.
CONVERSION OF DEBENTURES
The holders of Debentures will be entitled at any time prior to the close
of business on September 1, 2006, subject to prior redemption, to convert the
Debentures or portions thereof (which are $1,000 or integral multiples thereof)
into shares of Common Stock of the Company, at the conversion price set forth on
the cover page of this Prospectus, subject to adjustment as described below.
Except as described below, no adjustment will be made on conversion of any
Debenture for interest accrued thereon or for dividends on any shares of Common
Stock issued. If any Debenture not called for redemption is converted between a
record date for the payment of interest and the related interest payment date,
the Debenture must be accompanied by funds equal to the interest payable on such
interest payment date on the principal amount so converted. The Company is not
permitted to issue fractional shares of Common Stock upon conversion of
Debentures and, in lieu thereof, will pay a cash adjustment based upon the
market price of the Common Stock on the last trading day prior to the date of
conversion. In the case of Debentures called for redemption, conversion rights
will expire at the close of business on the redemption date.
The conversion price is subject to adjustment under formulae as set forth
in the Indenture in certain events, including: the issuance of shares of Common
Stock of the Company as a dividend or distribution on the Common Stock;
subdivisions, combinations, and reclassifications of the Common Stock; the
issuance to all holders of Common Stock of certain rights or warrants entitling
them for a period not exceeding 45 days to subscribe for Common Stock at less
than the then current market price (as defined); and the distribution to all
holders of Common Stock of any securities (other than Common Stock) or evidences
of indebtedness of the Company or of assets (excluding cash dividends or
distributions from retained earnings) or rights or warrants to subscribe for or
purchase any of its securities (excluding those referred to above). No
adjustment in the conversion price will be required unless such adjustment would
require a change of at least 1% in the conversion price then in effect;
provided, however, that any adjustment that would otherwise be required to be
made shall be carried forward and taken into account in any subsequent
adjustment. The Company reserves the right to make such reductions in the
conversion price, in addition to those required by the foregoing provisions, as
the Company in its discretion shall determine to be advisable in order that
certain share-related distributions made by the Company to its shareholders
after the date of this Prospectus will not be taxable. Except as stated above,
the conversion price will not be adjusted for the issuance of shares of Common
Stock
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<PAGE> 33
or any securities convertible into or exchangeable for Common Stock, or carrying
the right to purchase any of the foregoing, in exchange for cash, property, or
services.
In the case of a consolidation, merger or statutory share exchange
involving the Company as a result of which holders of Common Stock will be
entitled to receive stock, securities or other property or assets (including
cash) with respect to or in exchange for shares of Common Stock or in the case
of a sale or conveyance to another corporation of all or substantially all the
property and assets of the Company, the holders of the Debentures then
outstanding will be entitled thereafter to convert such Debentures into the kind
and amount of shares of stock, other securities or other property or assets
which they would have owned or been entitled to receive upon such consolidation,
merger, statutory share exchange, sale or conveyance had such Debentures been
converted to shares of Common Stock immediately prior to such consolidation,
merger, statutory share exchange, sale or conveyance.
In the event of a taxable distribution to holders of Common Stock which
results in an adjustment of the conversion price, the holders of Debentures may,
in certain circumstances, be deemed to have received a distribution subject to
United States income tax as a dividend; the absence of such an adjustment in
certain other circumstances may also result in a taxable dividend to the holders
of Common Stock.
OPTIONAL REDEMPTION
The Debentures will be redeemable on at least 15 and not more than 60 days'
notice, at the option of the Company, as a whole or in part, at any time after
issuance, at the following prices (expressed as percentages of the principal
amount), together with accrued interest to the date fixed for redemption:
If redeemed during the 12-month period beginning September 1:
<TABLE>
<CAPTION>
YEAR PERCENTAGE YEAR PERCENTAGE
- ---- ---------- ---- ----------
<S> <C> <C> <C>
1997 106% 2000 103%
1998 105 2001 102
1999 104 2002 101
</TABLE>
and 100% if redeemed on or after September 1, 2003; provided, however, that the
Debentures may not be redeemed prior to September 1, 1999, unless the last
reported sales price (determined as provided in the Indenture) of the Common
Stock equals or exceeds 140% of the then effective conversion price (as
described above) for at least 20 trading days within a period of 30 consecutive
trading days ending no earlier than five trading days prior to the date of the
notice of redemption.
SUBORDINATION OF DEBENTURES
The indebtedness evidenced by the Debentures is subordinate to the prior
payment in full of all Senior Indebtedness (as defined). During the continuance
beyond any applicable grace period of any default in the payment of principal,
interest or rental on any Senior Indebtedness, no payment of principal of,
premium, if any, or interest on the Debentures shall be made by the Company. In
addition, upon any distribution of assets of the Company upon any dissolution,
winding up, liquidation or reorganization, the payment of the principal of,
premium, if any, and interest on the Debentures is to be subordinated to the
extent provided in the Indenture in right of payment to the prior payment in
full of all Senior Indebtedness. By reason of such subordination, in the event
of the Company's dissolution, holders of Senior Indebtedness may receive more,
ratably, and holders of the Debentures may receive less, ratably, than the other
creditors of the Company or may receive no consideration at all. Such
subordination will not prevent the occurrence of any Event of Default under the
Indenture.
The term "Senior Indebtedness" will be defined to mean the following,
whether outstanding on the date of execution of the Indenture or thereafter
created, incurred, assumed or guaranteed:
(a) Principal of and premium, if any, and interest on indebtedness of
the Company for money borrowed (including any indebtedness secured by a
mortgage or other lien which is (i) given to secure all or part of the
purchase price of property subject thereof, whether given to the vendor of
such property or to another, or (ii) existing on property at the time of
acquisition thereof) evidenced by notes or other written obligations;
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<PAGE> 34
(b) Principal of and premium, if any, and interest on indebtedness of
the Company evidenced by notes, debentures, bonds or other securities of
the Company;
(c) The amount of the Company's liability determined under generally
accepted accounting principles under any lease required to be classified as
a liability on the Company's balance sheet;
(d) Principal of and premium, if any, and interest on indebtedness of
others of the kinds described in either of the preceding clauses (a) or
(b), or, to the extent set forth in the preceding clause (c), leases of
others of the kind described in the preceding clause (c) assumed by or
guaranteed in any manner by the Company or in effect guaranteed by the
Company through an agreement to purchase, contingent or otherwise; and
(e) Principal of and premium, if any, and interest on renewals,
extensions, or refundings of indebtedness of the kinds described in any of
the preceding clauses (a), (b) or (d) or, to the extent set forth in the
preceding clause (c), renewals or extensions of leases of the kinds
described in either of the preceding clauses (c) or (d);
unless, in the case of any particular indebtedness, lease, renewal, extension,
or refunding, the instrument or lease creating or evidencing the same or the
assumption or guarantee of the same expressly provides that such indebtedness,
lease, renewal, extension, or refunding is subordinate to any other indebtedness
of the Company or that such indebtedness, lease, renewal, extension, or
refunding is not superior in right of payment to the Debentures.
The Indenture permits the Trustee to become a creditor of the Company and
does not preclude the Trustee from enforcing its rights as a creditor, including
rights as a holder of Senior Indebtedness.
REPURCHASE EVENT
Upon the occurrence of a Repurchase Event, each holder of Debentures shall
have the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's Debentures pursuant to
the offer described below (the "Repurchase Offer") at a purchase price equal to
101% of the aggregate principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase (the "Repurchase Payment"). Within 30 days after
the occurrence of a Repurchase Event, the Company shall mail a notice to each
holder stating among other things: (1) the Repurchase Payment and the purchase
date, which shall not be earlier than 45 days nor later than 60 days from the
date such notice is mailed or such later date as may be necessary for the
Company to comply with the requirements of the 1934 Act (the "Repurchase Date");
(2) that any Debenture not tendered will continue to accrue interest; (3) that,
unless the Company defaults in the payment of the Repurchase Payment, all
Debentures accepted for payment pursuant to the Repurchase Offer shall cease to
accrue interest after the Repurchase Date; and (4) certain other procedures that
a holder must follow to accept a Repurchase Offer or to withdraw such
acceptance. The Company will comply with any applicable requirements of the
Exchange Act and other securities laws, and the regulations thereunder,
governing the repurchase of the Debentures in connection with a Repurchase Event
and may modify a Repurchase Offer to effect such compliance.
A Repurchase Event is generally defined to include (i) the acquisition of
50% or more of the Company's voting stock by a person or group, other than any
current holder of 5% or more of the Company's Common Stock (or a group including
such a holder); (ii) a change, over a two-year period, in the composition of the
Company's Board of Directors such that, with limited exceptions, the Board
members at the beginning of the period no longer constitute a majority of the
Board; (iii) certain consolidations and mergers involving the Company or sales
of assets of the Company, if the primary effect is that, after the transaction,
a person or group, other than a current holder of 5% or more of the Company's
Common Stock (or group including such a holder), has more than 50% of the
ordinary voting power of the surviving corporation; (iv) the acquisition by the
Company of over 30% of the outstanding shares of its capital stock during any
12-month period; and (v) certain (A) distributions in respect of the Company's
capital stock or (B) acquisitions by the Company of its capital stock, if, in
either case, the sum of the (x) ratio of the fair market value of the price paid
in the current distribution or acquisition to the then-fair market value of the
Company's outstanding capital stock plus (y) the similar ratios for all other
distributions or acquisitions, respectively, during the prior 12-month period,
exceeds 30%. For purposes of the Repurchase Event tests, the Company's "voting
stock" means the Common
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<PAGE> 35
Stock plus any other class or classes of stock which may be issued and have
general voting power in the election of the Company's Board of Directors. The
Company's "capital stock" means any stock which does not have dividend or
liquidation priority over other stock of the Company, irrespective of relative
voting powers. Currently, the Company's only "voting stock" and "capital stock"
is its Common Stock.
On the Repurchase Date, the Company will deposit with the Trustee an amount
equal to the Repurchase Payment in respect of all Debentures or portions thereof
that have been tendered. The Trustee shall promptly mail to each holder of
Debentures accepted for payment an amount equal to the Repurchase Price for such
Debentures, and the Trustee shall promptly authenticate and mail to each holder
a new Debenture equal in principal amount to any unpurchased portion of the
Debentures surrendered.
Except as described above with respect to a Repurchase Event, the Indenture
does not contain any other provisions that permit the holders of the Debentures
to require that the Company repurchase or redeem the Debentures in the event of
a takeover or similar transaction. The provisions of the Indenture relating to
the purchase of Debentures upon a Repurchase Event may impede the completion of
a merger, tender offer or other takeover attempt. See "Description of Capital
Stock." Neither the Trustee nor the Company's Board of Directors may relieve the
Company of its obligation to repurchase Debentures.
Any future credit agreements or other agreements relating to Senior
Indebtedness to which the Company becomes a party may prohibit the Company from
purchasing any Debentures or may provide that certain change in control events
with respect to the Company would constitute a default under such agreements. In
the event a Repurchase Event occurs at a time when the Company is prohibited
from purchasing Debentures, the Company could seek the consent of its lenders
for the purchase of Debentures or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or repay
such borrowings, the Company will remain prohibited from purchasing Debentures.
In such case, the Company's failure to purchase tendered Debentures would
constitute an Event of Default under the Indenture. In such circumstances, the
subordination provisions in the Indenture would restrict payments to the holders
of Debentures.
EVENTS OF DEFAULT
An Event of Default will be defined in the Indenture as being: default in
the payment of any installment of interest upon any of the Debentures as and
when the same shall become due and payable, and continuance of such default for
a period of 15 days; default in payment of principal or premium, if any, on the
Debentures when the same becomes due and payable at maturity, upon redemption or
otherwise, whether or not prohibited by the subordination provisions of the
Indenture; default by the Company for 30 days after notice in the observance or
performance of any other covenant in the Indenture; default under any
obligations for money borrowed aggregating $1,000,000 or more; or certain events
involving bankruptcy, insolvency, or reorganization of the Company. The
Indenture will provide that the Trustee is required, within 90 days after the
occurrence of a default which is known to the Trustee and is continuing, to give
to the holders of the Debentures notice of such default; provided that, except
in the case of default in the payment of principal or premium, if any, or
interest on any of the Debentures, the Trustee shall be protected in withholding
such notice if it in good faith determines that the withholding of such notice
is in the interest of the holders of the Debentures.
The Indenture will provide that if any Event of Default shall have occurred
and be continuing, the Trustee or the holders of not less than 25% in principal
amount of the Debentures then outstanding may declare the principal of all the
Debentures to be due and payable immediately, but if the Company shall cure all
defaults (other than the nonpayment of interest and premium, if any, on and
principal of any Debentures which shall have become due solely by reason of
acceleration) and certain other conditions are met, such declaration may be
annulled and past defaults may be waived by the holders of a majority in
principal amount of the Debentures then outstanding.
The holders of a majority in principal amount of the Debentures then
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee subject to
certain limitations specified in the Indenture.
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<PAGE> 36
In certain cases, the holders of a majority in principal amount of the
outstanding Debentures may on behalf of the holders of all Debentures waive any
past default or Event of Default except, unless theretofore cured, a default in
the payment of the principal of, premium, if any, or interest on any of the
Debentures (other than the nonpayment interest and premium, if any, on and
principal of any Debentures which shall become due by acceleration) or a default
relating to an obligation of the Company which cannot be modified without the
consent of the holder of each Debenture affected.
MERGERS AND SALES OF ASSETS BY THE COMPANY
Subject to the provisions described above under "Repurchase Event," the
Company may consolidate with or merge into any other corporation, or sell or
transfer all or substantially all of its assets to any corporation, provided
that the successor corporation shall be a corporation organized and existing
under the laws of the United States or any State thereof and shall assume all of
the obligations of the Company under the Indenture.
MODIFICATION OF THE INDENTURE
The Indenture will contain provision permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
principal amount of the Debentures at the time outstanding, to modify the
Indenture or any supplemental indenture or the rights of the holders of the
Debentures except that no such modification shall, without the consent of the
holder of each Debenture so affected (i) extend the fixed maturity of any
Debenture, reduce the rate or extend the time of payment of interest thereon,
reduce the principal amount thereof or redemption premium thereon, impair or
affect the right of a holder to institute suit for the payment thereof, change
the currency in which the Debentures are payable or impair the right to convert
the Debentures into shares of Common Stock subject to the terms set forth in the
Indenture, or (ii) reduce the aforesaid percentage of Debentures, the consent of
the holders of which is required for any such modification.
MISCELLANEOUS
No holder of a Debenture may institute any action against the Company under
the Indenture (except actions for payment of overdue principal, premium, if any,
or interest or the conversion of the Debentures) unless the holders of at least
25% of the principal amount of Debentures then outstanding shall have requested
the Trustee to institute such action, and the Trustee shall not have instituted
such action within 60 days of such request.
A director, officer, employee or shareholder, as such, of the Company shall
not have any liability for any obligations of the Company under the Debentures
or the Indenture, or for any claim based on, in respect of or by reason of, such
obligations or their creation. Each holder of Debentures by accepting a
Debenture waives and releases all such liability. The waiver and release are
part of the consideration for the issuance of the Debentures.
Whether or not required by the rules and regulations of the Commission, so
long as any Debentures are outstanding, the Company will furnish holders of
Debentures all quarterly and annual information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K as if the
Company were required to file such Forms. See "Available Information."
CONCERNING THE TRUSTEE
Star Bank, National Association, the Trustee under the Indenture, may at
times be a depository for funds of, make loans to or perform services for the
Company and its subsidiaries in the normal course of business. The Indenture
does not preclude the Trustee from enforcing its rights as a creditor, including
rights as a holder of Senior Indebtedness.
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<PAGE> 37
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, without par value, and 1,000,000 shares of preferred stock,
without par value. The following description of certain matters relating to the
capital stock of the Company is a summary and is qualified in its entirety of
the provisions of the Company's Articles of Incorporation and Code of
Regulations.
COMMON STOCK
The Company had 14,277,509 shares issued and outstanding immediately prior
to the date of this Prospectus. Holders of Common Stock are entitled to one vote
for each share held of record on all matters submitted to a vote of
shareholders. Shareholders have the right to cumulate their votes in the
election of directors.
Subject to preferences which may be granted to holders of preferred stock,
holders of Common Stock are entitled to share in such dividends as the Board of
Directors, in its discretion, may validly declare from funds legally available.
In the event of liquidation, each outstanding share of Common Stock entitles its
holder to participate ratably in the assets remaining after payment of
liabilities and any preferred stock liquidation preferences.
Shareholders have no preemptive or other rights to subscribe for or
purchase additional shares of any class of stock or any other securities of the
Company and there are no redemption or sinking fund provisions with regard to
the Common Stock. All outstanding shares of Common Stock are fully paid, validly
issued, and non-assessable.
The vote of the holders of 66 2/3% of all outstanding shares is required to
amend the Articles of Incorporation and to approve mergers, reorganizations and
similar transactions.
PREFERRED STOCK
Preferred stock may be issued from time to time in series having such
designated preferences and rights, qualifications and limitations as the Board
of Directors may determine without any approval of shareholders. Preferred stock
could be given voting and conversion rights which would adversely affect the
voting power and equity of holders of Common Stock and could have preference to
Common Stock with respect to dividend and liquidation rights. The preferred
stock could have the effect of acting as an anti-takeover device to prevent a
change of control of the Company. None of the preferred stock is outstanding and
the Company has no plans at present to issue any such shares.
PROVISIONS AFFECTING BUSINESS COMBINATIONS
Ohio law governs the rights of shareholders of the Company. Chapter 1704 of
the Ohio Revised Code may be viewed as having an antitakeover effect. This
statute, in general, prohibits an "issuing public corporation" (the definition
of which would include the Company) from entering into a "Chapter 1704
Transaction" with the beneficial owner (or affiliates of such beneficial owner)
of 10% or more of the outstanding shares of the corporation (an "interested
shareholder") for at least three years following the date on which the
interested shareholder attains such 10% ownership, unless the board of directors
of the corporation approves, prior to such person becoming an interested
shareholder, either the transaction or the acquisition of shares resulting in a
10% ownership. A "Chapter 1704 Transaction" is broadly defined to include, among
other things, a merger or consolidation with, sale of substantial assets to, or
the receipt of a loan, guaranty or other financial benefit (which is not
proportionately received by all shareholders) by the interested shareholder.
Following the expiration of such three-year period, a Chapter 1704 Transaction
with the interested shareholder is permitted only if either (i) the transaction
is approved by the holders of at least two-thirds of the voting power of the
corporation (or such different proportion as set forth in the corporation's
articles of incorporation), including a majority of the outstanding shares,
excluding those owned by the interested shareholder, or (ii) the business
combination results in the shareholders other than the interested shareholder
receiving a prescribed "fair price" for their shares. One significant effect of
Chapter 1704 is to cause an interested shareholder to negotiate with the board
of directors of a corporation prior to becoming an interested shareholder.
37
<PAGE> 38
In addition, Section 1707.043 of the Ohio Revised Code requires a person or
entity that makes a proposal to acquire the control of a corporation to repay to
that corporation any profits made from trades in the corporation's stock within
18 months after making the control proposal.
Section 1701.831 of the Ohio Revised Code contains provisions which permit
a "control share acquisition" of an "issuing public corporation" only with the
prior authorization of a majority of the disinterested shareholders, which could
operate as a deterrent to an acquisition of the Company. However, as permitted
by this Section, the Company's Articles of Incorporation contain a provision
exempting the Company from the operation of this Section. As a result, these
provisions of the Ohio Revised Code will not act as a deterrent to an
acquisition of the Company or the accumulation of a large amount of the
Company's Common Shares. However, the Company's Articles of Incorporation could
be amended in the future to make Section 1701.831 applicable to the Company with
the vote of two-thirds of the shares eligible to vote on the proposal.
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent for the Company's Common Stock is The
Fifth Third Bank, Cincinnati, Ohio.
38
<PAGE> 39
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the underwriters named below (the "Underwriters"),
for whom Roney & Co. is acting as representative (the "Representative"), have
individually agreed to purchase from the Company the principal amounts of
Debentures set forth below opposite their respective names at the public
offering price less the underwriting discount set forth on the cover page of
this Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of such Debentures if any are
purchased.
<TABLE>
<CAPTION>
PRINCIPAL
NAME AMOUNT
---- -----------
<S> <C>
Roney & Co. ............................................................ $12,320,000
EVEREN Securities, Inc. ................................................ 640,000
Janney Montgomery Scott Inc. ........................................... 640,000
Ladenburg, Thalmann & Co. Inc. ......................................... 640,000
Legg Mason Wood Walker Incorporated..................................... 640,000
McDonald & Company Securities, Inc. .................................... 640,000
Morgan Keegan & Company, Inc. .......................................... 640,000
Pennsylvania Merchant Group Ltd......................................... 640,000
Piper Jaffray Inc. ..................................................... 640,000
Robert W. Baird & Co. Incorporated...................................... 640,000
Stifel, Nicolaus & Company, Incorporated................................ 640,000
The Chicago Corporation................................................. 640,000
The Ohio Company........................................................ 640,000
-----------
Total......................................................... $20,000,000
===========
</TABLE>
The Underwriters propose to offer the Debentures to the public initially at
the offering price set forth on the cover page of this Prospectus and to certain
broker dealers at such offering price less a concession not to exceed 2.7% of
the principal amount. The Underwriters may allow, and such broker dealers may
re-allow, a concession, not to exceed 1.5% of the principal amount, on sales to
other broker dealers. The offering price and concessions to broker dealers may
be changed by the Underwriters after the initial offering.
The offering of the Debentures is made for delivery when, as and if
accepted by the Underwriters, subject to prior sale and withdrawal, cancellation
or modification of the offer without notice.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days from the date of this Prospectus, to purchase up to an
additional $3,000,000 principal amount of Debentures to cover over-allotments.
The Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the $20,000,000 principal amount of Debentures
offered hereby. If purchased, the Underwriters will sell such additional
Debentures on the same terms on which the $20,000,000 principal amount of
Debentures are being offered.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act of
1933.
In connection with this offering, certain Underwriters and selling group
members, if any, or their respective affiliates may engage in passive market
making transactions in the Common Stock on The Nasdaq National Market in
accordance with Rule 10b-6A under the Exchange Act. Passive market making
consists of, among other things, displaying bids limited by the bid prices of
independent market makers and purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited to a specified percentage of the passive market maker's average daily
trading volume in the Common Stock during a specified prior period and all
possible market making activity must be discontinued when such limit is reached.
Passive market making may stabilize the market price of the Common Stock at a
level above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
39
<PAGE> 40
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Company by Keating, Muething & Klekamp, Cincinnati,
Ohio. Gary P. Kreider, a partner in Keating, Muething & Klekamp, serves as a
director of the Company. Members of that firm beneficially own 34,643 shares of
Common Stock. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Taft, Stettinius & Hollister, Cincinnati,
Ohio.
EXPERTS
The audited financial statements and schedules included or incorporated by
reference in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
40
<PAGE> 41
GLOSSARY OF SELECTED TERMS
The following glossary defines terms used to describe the Company's
business.
ANTIBODY. Highly specific proteins that bind with and counteract antigens.
Immunoassays make use of the specific binding properties of antibodies with
antigens in diagnostic tests.
ANTIGEN. A foreign substance, generally produced by a bacterium, virus or
fungus which immunoassays measure, that induces the formation of antibodies.
ASPERGILLUS. A fungus which is an opportunistic pathogen and may produce a
severe and persistent infection.
ASSAY. Any test procedure used to detect or measure a specific substance
in body fluids.
BLASTOMYCES. A fungus which causes infection due to inhalation through the
pulmonary route. Infection is marked by tumors in the skin or by lesions in the
lungs, bones, tissues, liver, spleen and kidneys.
C. DIFFICILE. A bacteria (Clostridium difficile) which causes a serious
diarrheal disease affecting the digestive system. Toxigenic strains of C.
difficile produce two toxins having pathogenic effects in humans. Toxin A causes
enteric fluid accumulation, diarrhea and intestinal hemorrhaging. It has been
hypothesized that, once the colon is damaged by toxin A, toxin B can enter the
circulatory system and cause widespread tissue deterioration.
COCCIDIOIDES. A fungus which causes infection due to the inhalation of
spores. The primary form of the disease is an acute respiratory infection. It is
primarily endemic in arid areas such as southern Arizona and Southern California
and is commonly known as "Valley Fever".
CRYPTOCOCCUS. An opportunistic yeastlike organism which infects humans,
causing an infection involving the skin, lungs, brain and spinal column,
commonly associated with immunocompromised patients, such as those suffering
from AIDS and cancer.
CRYPTOSPORIDIUM. A severe parasitic infection of the gastrointestinal
tract causing severe diarrhea, abdominal pain and electrolyte imbalance.
CYTOMEGALOVIRUS. One of a group of herpes viruses that infect humans. This
virus can cause a variety of symptoms, but the majority of infections are very
mild or subclinical.
ENZYME. Protein which accelerates reactions between substances; used to
produce a color in enzyme immunoassays.
ENZYME IMMUNOASSAY ("EIA"). Immunoassay using an enzyme conjugated to the
antigen or a specific antibody which is used to detect its homologous antibody
or antigen.
FUNGAL SEROLOGY. Diagnosis of fungus-related systemic and respiratory
infections.
GIARDIA. The most common single-celled parasite which is spread via
contaminated food and water and direct person-to-person contact. Representing
the most common parasitic disease, it infects the small intestine, producing
diarrhea, gastrointestinal discomfort, electrolyte imbalance, nausea and weight
loss.
H. PYLORI. Helicobacter pylori is the most common and important cause of
gastritis and has been linked to the cause of chronic recurrent duodenal ulcers.
Treatments that eradicate H. pylori have produced dramatic reductions in ulcer
recurrence.
HERPES SIMPLEX VIRUS. A herpes virus which is characterized by the
formation of clusters of small vesicles and causes an inflammatory skin disease.
HISTOPLASMA. A fungus which causes infection due to the inhalation or
ingestion of spores. The infection is usually asymptomatic, but may cause acute
pneumonia.
IMMUNOASSAY. Procedure using antigens and antibodies to detect and measure
minute concentrations of biological materials; includes radioimmunoassay and
nonisotopic assays, which do not use radioactive materials, such as enzyme
immunoassay.
IMMUNODIAGNOSTIC. Diagnosis based on blood serum reactions to antigens.
41
<PAGE> 42
IMMUNODIFFUSION. A technique of study of antigen-antibody reactions by
observing precipitates formed by the combination of specific antigens and
antibodies which have diffused in a gel in which they had been separately
placed.
IMMUNOFLUORESCENCE. The use of fluorescence-labeled antibodies to identify
bacterial, viral or other antigenic material specific to the labeled antibody.
IN VITRO. Outside the living body, for example, in a test tube.
MONONUCLEOSIS. A common, acute, self-limited disease caused by the
Epstein-Barr virus.
MONOCLONAL ANTIBODY. An antibody produced from a single clone of a plasma
cell against a single antigenic epitope.
PARASITOLOGY. The study of the diseased condition resulting from parasitic
infection.
PARTICLE AGGLUTINATION. A test format in which antigens or antibodies bind
to solid particles enabling visualization of test result.
PATHOGEN. An agent that causes disease such as a bacterium, virus or
fungi.
PNEUMOCYSTIS. A microorganism which is the causative agent of a highly
contagious, epidemic pneumonia.
POLYCLONAL ANTIBODY. Antibodies produced from a series of plasma cells
against a variety of antigenic epitopes.
REAGENTS. Biological chemicals required to perform immunoassays; includes
antibodies and antigens.
STREP A. A classification of streptococci based upon cell-wall
carbohydrate antigens. Streptococci Group A are bacteria which cause conditions
such as septic sore throat, scarlet fever, and rheumatic fever.
42
<PAGE> 43
MERIDIAN DIAGNOSTICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Public Accountants............................................ F-2
Consolidated Balance Sheets as of September 30, 1995 and 1994....................... F-3
Consolidated Statements of Earnings for the Years Ended September 30, 1995, 1994 and
1993.............................................................................. F-4
Consolidated Statements of Shareholders' Equity for the Years Ended September 30,
1995, 1994 and 1993............................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1995, 1994
and 1993.......................................................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
Consolidated Balance Sheets as of June 30, 1996 (unaudited) and September 30,
1995.............................................................................. F-16
Consolidated Statements of Earnings for the Nine Months Ended June 30, 1996 and 1995
(unaudited)....................................................................... F-18
Consolidated Statements of Shareholders' Equity for the Nine Months Ended June 30,
1996 (unaudited).................................................................. F-19
Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 1996 and
1995 (unaudited).................................................................. F-20
Notes to Consolidated Financial Statements (unaudited).............................. F-21
</TABLE>
F-1
<PAGE> 44
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, 1995 and 1994, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the three years in the period ended September 30, 1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
November 10, 1995
F-2
<PAGE> 45
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and short-term investments (Note 2).................................. $ 8,918,637 $ 8,831,983
Accounts receivable, less allowance of $164,136 in 1995 and $113,183 in
1994 for doubtful accounts.............................................. 6,482,999 5,169,989
Inventories (Note 3)...................................................... 3,032,655 3,020,071
Prepaid expenses and other................................................ 321,775 108,423
Deferred tax assets....................................................... 324,910 282,929
----------- -----------
Total current assets............................................... 19,080,976 17,413,395
----------- -----------
Property, Plant and Equipment:
Land...................................................................... 269,217 273,688
Buildings and improvements................................................ 6,162,668 3,716,649
Machinery, equipment and furniture........................................ 5,525,455 4,595,550
Construction in progress.................................................. -- 1,063,702
----------- -----------
11,957,340 9,649,589
Less -- accumulated depreciation and amortization......................... 4,816,905 4,248,561
----------- -----------
Net property, plant and equipment.................................. 7,140,435 5,401,028
----------- -----------
Other Assets (Notes 1 and 4):
Long-term receivable...................................................... 12,670 --
Deferred tax assets....................................................... 87,879 59,841
Deferred debenture offering costs, net of accumulated amortization of
$133,357 in 1995 and $96,876 in 1994.................................... 395,731 665,595
Covenants not to compete, net of accumulated amortization of $1,827,718 in
1995 and $1,337,375 in 1994............................................. 2,432,876 2,923,219
License agreements, net of accumulated amortization of $772,433 in 1995
and $714,878 in 1994.................................................... 362,680 420,235
Patent, tradenames and distributorships, net of accumulated amortization
of $475,762 in 1995 and $267,365 in 1994................................ 1,837,238 2,045,635
Other intangible assets, net of accumulated amortization of $85,570 in
1995 and $43,503 in 1994................................................ 620,192 685,218
Cost in excess of net assets acquired, net of accumulated amortization of
$458,482 in 1995 and $255,753 in 1994................................... 2,598,511 2,714,964
----------- -----------
Total other assets................................................. 8,347,777 9,514,707
----------- -----------
Total assets....................................................... $34,569,188 $32,329,130
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations (Note 5)......................... $ 381,932 $ 367,969
Current portion of capital lease obligations (Note 5)..................... 63,561 --
Accounts payable.......................................................... 689,869 1,843,489
Accrued payroll and payroll taxes......................................... 723,946 650,530
Other accrued expenses.................................................... 937,348 649,732
Income taxes payable...................................................... 458,707 902,069
----------- -----------
Total current liabilities.......................................... 3,255,363 4,413,789
----------- -----------
Long-Term Obligations (Note 5).............................................. 12,285,668 14,683,369
----------- -----------
Capital Lease Obligations (Note 5).......................................... 149,925 --
----------- -----------
Shareholders' Equity (Note 7):
Preferred stock, no par value, 1,000,000 shares authorized; none issued... -- --
Common stock, no par value, 25,000,000 shares authorized; 12,924,814 and
12,292,935 shares issued and outstanding, respectively, stated at....... 1,487,159 1,179,583
Additional paid-in capital................................................ 13,895,901 10,824,012
Retained earnings......................................................... 3,747,930 1,448,736
Cumulative foreign currency translation adjustment........................ (252,758) (220,359)
----------- -----------
Total shareholders' equity......................................... 18,878,232 13,231,972
----------- -----------
Total liabilities and shareholders' equity......................... $34,569,188 $32,329,130
=========== ===========
</TABLE>
- ---------------
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-3
<PAGE> 46
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales........................................... $25,109,711 $21,876,773 $16,170,990
Cost of Sales....................................... 8,008,529 7,518,179 5,097,988
----------- ----------- -----------
Gross profit.............................. 17,101,182 14,358,594 11,073,002
----------- ----------- -----------
Operating Expenses:
Research and development.......................... 1,432,315 1,432,928 1,165,210
Selling and marketing............................. 5,228,717 4,747,398 3,715,517
General and administrative........................ 3,864,294 3,364,584 2,667,172
----------- ----------- -----------
Total operating expenses.................. 10,525,326 9,544,910 7,547,899
----------- ----------- -----------
Operating income.......................... 6,575,856 4,813,684 3,525,103
Other Income (Expense):
Licensing and related fees........................ 102,698 -- 55,000
Interest income................................... 435,686 253,644 56,551
Interest expense.................................. (1,134,844) (1,092,345) (178,950)
Cost of withdrawn stock offering.................. -- -- (404,499)
Other, net........................................ (19,470) 8,420 48,153
----------- ----------- -----------
Total other income (expense).............. (615,930) (830,281) (423,745)
----------- ----------- -----------
Earnings before income taxes.............. 5,959,926 3,983,403 3,101,358
Income Taxes (Note 6)............................... 2,435,815 1,542,282 1,211,904
----------- ----------- -----------
Net earnings.............................. $ 3,524,111 $ 2,441,121 $ 1,889,454
=========== =========== ===========
Primary Weighted Average Number of Common Shares
Outstanding....................................... 12,354,752 12,277,392 12,263,791
=========== =========== ===========
Primary Earnings Per Common Share................... $ .29 $ .20 $ .15
=========== =========== ===========
Fully Diluted Weighted Average Number of Common
Shares Outstanding................................ 14,541,603 NA NA
=========== =========== ===========
Fully Diluted Earnings Per Common Share............. $ .28 NA NA
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE> 47
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF CUMULATIVE
COMMON FOREIGN
SHARES ADDITIONAL CURRENCY
ISSUED AND COMMON PAID-IN RETAINED TRANSLATION
OUTSTANDING STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
----------- ---------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1992... 7,705,453 $ 851,975 $ 7,563,763 $ 2,258,187 $ 2,560 $10,676,485
Net earnings.................... -- -- -- 1,889,454 -- 1,889,454
Cash dividends paid -- $.06 per
share as adjusted............. -- -- -- (702,325) -- (702,325)
Exercise of stock options....... 1,249 900 4,839 -- -- 5,739
3% stock dividend............... 231,201 154,142 1,811,067 (1,965,209) -- --
Foreign currency translation
adjustment.................... -- -- -- -- (252,341) (252,341)
----------- ---------- ----------- ----------- --------- -----------
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
=========== ========== =========== =========== ========= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-5
<PAGE> 48
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings............................................... $ 3,524,111 $ 2,441,121 $ 1,889,454
Non-cash items --
Depreciation and amortization of property, plant and
equipment............................................. 863,436 703,190 580,979
Amortization of intangible assets....................... 1,147,987 1,009,950 471,045
Deferred interest expense............................... 154,950 94,978 --
Revenues received in advance recorded in income......... -- -- (55,000)
Deferred income taxes................................... (70,019) (263,977) 28,079
Changes in current assets excluding cash and short-term
investments............................................. (1,611,612) (1,865,471) (1,328,516)
Changes in current liabilities excluding current portion of
long-term obligations................................... (1,150,277) 2,305,066 516,355
Long-term receivable and payable........................... (2,470) -- --
----------- ----------- -----------
Net cash provided by operating activities.......... 2,856,106 4,424,857 2,102,396
----------- ----------- -----------
Cash Flows from Investing Activities:
Property, plant, and equipment acquired, net............... (2,472,177) (1,426,485) (718,135)
Product line acquisition --
Inventory and equipment................................. -- (571,446) (262,972)
Covenants not to compete................................ -- (1,100,000) (1,500,000)
Patent, tradenames, customer lists and other............ -- (1,375,000) (1,394,000)
Cost in excess of net assets acquired................... -- (346,434) (297,722)
Proceeds from sale of product line......................... -- 500,000 --
Acquisition of license agreements.......................... -- (55,898) (80,000)
Advance royalties paid..................................... -- (25,000) --
----------- ----------- -----------
Net cash used for investing activities............. (2,472,177) (4,400,263) (4,252,829)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from subordinated debentures, net of offering
costs................................................... -- -- 10,737,530
Proceeds from other long-term obligations.................. 1,284,005 634,970 --
Repayment of long-term obligations......................... (388,246) (462,339) (219,145)
Dividends paid............................................. (1,224,917) (908,209) (702,325)
Proceeds from issuance of common stock..................... 45,750 52,626 5,739
Effect of exchange rate changes on cash.................... (13,867) 14,749 (6,229)
----------- ----------- -----------
Net cash provided by (used for) financing
activities....................................... (297,275) (668,203) 9,815,570
----------- ----------- -----------
Net Increase (Decrease) in Cash and Short-Term Investments... 86,654 (643,609) 7,665,137
Cash and Short-Term Investments at Beginning of Period....... 8,831,983 9,475,592 1,810,455
----------- ----------- -----------
Cash and Short-Term Investments at End of Period............. $ 8,918,637 $ 8,831,983 $ 9,475,592
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for --
Income taxes............................................ $ 2,882,336 $ 1,034,000 $ 1,195,000
Interest................................................ 883,356 852,265 160,062
Capitalized lease obligations.............................. 259,240 -- --
Estimated contingent consideration related to product line
acquisitions (Note 5)................................... -- 1,972,000 --
Conversion of debentures to common stock, net of
amortization of deferred debenture offering costs of
$186,285 (Note 5)....................................... 3,333,715 -- --
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE> 49
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
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.1. ("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 Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (FAS 115), in 1995. In accordance with FAS 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 FAS 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 short-term investments due to their
short-term nature. These investments are diversified among high credit quality
securities. The estimated fair value of cash investments approximates cost, and
therefore, there are no unrealized gains or losses as of September 30, 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
writeoff 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) OTHER ASSETS -- Other 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 -- 7 to 10 years
License agreements -- 3 to 10 years
Patents, tradenames and distributorships -- 10 to 15 years
Cost in excess of net assets acquired and other intangible
assets -- 15 years
Deferred debenture offering costs -- 8 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 flow over the
remaining life of the asset in measuring whether the asset is recoverable.
(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.
F-7
<PAGE> 50
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Prior period
financial statements have not been restated to reflect the new accounting
method. The cumulative effect of this change, as well as the effect of this new
standard on income tax expense for the year ended September 30, 1994, and for
each of the quarters in the period then ended, is 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. No material dilution results from outstanding stock options which are the
only common stock equivalent. Fully diluted earnings per share are dilutive for
fiscal 1995 only and include the impact of assuming the convertible subordinated
debentures are converted, net of the impact of pro forma 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. On November 23, 1992, the Company's Board of Directors declared
a 5% stock dividend, and in March 1992, the Company's Board of Directors
declared a three-for-two stock split. 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) 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.
(k) 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>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net sales...................................... $5,811,000 $4,609,000 $2,930,000
Operating profit............................... 1,233,000 801,000 462,000
Pre-tax income................................. 979,000 579,000 446,000
Identifiable assets............................ 4,583,000 3,904,000 2,657,000
Accounts receivable............................ 2,538,000 2,052,000 1,313,000
</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,
-------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Customer A............................ $6,033 (24%) $5,042 (23%) $4,254 (26%)
Customer B............................ 2,569 (10%) 2,073 (9%) 1,823 (11%)
</TABLE>
F-8
<PAGE> 51
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments (with maturities of less than 4 months) are
comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Cash and money market funds................................. $1,562,795 $2,865,966
Commercial paper............................................ 3,655,842 3,996,017
Corporate and municipal put bonds........................... 3,700,000 1,970,000
---------- ----------
$8,918,637 $8,831,983
========== ==========
</TABLE>
At September 30, 1995 and 1994, the market value of the Company's
investments approximated cost. The municipal put bonds are putable every seven
days and the principal balance is secured by a bank letter of credit.
(3) INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Raw materials............................................... $1,165,319 $1,354,412
Work-in-process............................................. 626,077 649,205
Finished goods.............................................. 1,241,259 1,016,454
---------- ----------
$3,032,655 $3,020,071
========== ==========
</TABLE>
(4) PRODUCT AND LICENSE AGREEMENT ACQUISITIONS
(a) PRODUCT LINES -- 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 noncompetition 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).
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 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. No gain or loss was
recognized on this transaction.
Also, in June 1993, the Company acquired a product line from ODSI which
consisted of the branded products MONOSPOT and MONOLERT, which are rapid tests
for infectious mononucleosis. The acquisition included certain patent and
trademark rights, customer lists, inventory, technical information for the
manufacture of the products, certain equipment and a noncompetition agreement.
The purchase included $3,100,000 in cash paid to ODSI at the acquisition
date, inventory purchased at unit prices specified in the agreement which
aggregated approximately $233,000 and $122,000 of expenses. As
F-9
<PAGE> 52
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
additional consideration, Meridian will pay ODSI 6% of product sales made during
the three-year period beginning July 1, 1996. The Company has recorded the
estimated present value of this additional consideration (Note 5). The Company
also assumed ODSI's royalty obligations (equal to 4.25% of MONOLERT sales) to
The Scripps Research Institute ("Scripps"). The obligation to pay royalties to
Scripps expires in 2009.
(b) LICENSE AGREEMENTS -- The Company has entered various license
agreements as follows:
<TABLE>
<CAPTION>
DATE ACQUIRED LICENSOR/PRODUCT TERM COST
- -------------- ---------------- ---- ----
<S> <C> <C> <C>
October 1993 New England Medical fifteen years $81,000 of which
Center Hospital/E. coli $25,000 to be offset
Test against future
royalties
January 1993 Tacoma Trading ten years $80,000
Company/parasitology
concentration and
transport system
July 1991 Texas BioResource five years, option to $100,000 to be offset
Corp./bacterial urinary extend for two additional against future
tract infection test five-year terms royalties, option to
purchase 25,062 shares
of common stock which
vests at the end of the
agreement
April 1991 Disease Detection ten years, option to $442,000
International, extend for two additional
Inc./rapid tests for ten-year terms
the detection of strep
throat, pregnancy,
Toxoplasma, Rubella,
Cytomegalovirus and
Herpes
</TABLE>
F-10
<PAGE> 53
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LONG-TERM OBLIGATIONS, BANK CREDIT ARRANGEMENTS AND COMMITMENTS
(a) LONG-TERM OBLIGATIONS -- Long-term obligations is comprised of the
following at:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Convertible Subordinated Debentures, unsecured, 7 1/4%
annual interest payable semi-annually on March 1 and
September 1, principal due September 1, 2001............ $ 7,980,000 $11,500,000
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................................................. 113,932 292,969
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............ 481,250 556,250
Construction loan, interest at 7% to be converted to a 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....... 1,918,975 634,970
Estimated contingent consideration payable to ODSI,
discounted at 7.25%, payable in quarterly variable
installments, based on a percent of certain product
sales, from 1995 to 2004 (Note 4)....................... 2,163,244 2,067,149
Other..................................................... 10,199 --
----------- -----------
12,667,600 15,051,338
Less -- Current portion................................... 381,932 367,969
----------- -----------
$12,285,668 $14,683,369
=========== ===========
</TABLE>
The Convertible Debentures were called for redemption on October 10, 1995.
Holders of the Debentures have 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 will be redeemed at 105% of their
face amount plus accrued interest. The conversion price of $5.97 per share is
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 10, 1995,
$1,074,000 of Debentures were outstanding.
On a pro forma basis, assuming full conversion of the Debentures as of
October 1, 1994, primary earnings per share for the year ended September 30,
1995 would have been reduced by $0.01 per share from $0.29 per share to $0.28
per share.
The domestic bank notes payable are part of a bank credit arrangement which
also includes a $6,000,000 line of credit which calls for interest at the prime
rate and is part of the same security agreement. There were no borrowings
outstanding on the line of credit at September 30, 1995. 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.
F-11
<PAGE> 54
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities on the above long-term obligations are as follows:
<TABLE>
<S> <C>
1996............................................................ $ 381,932
1997............................................................ 771,672
1998............................................................ 379,451
1999............................................................ 372,479
2000............................................................ 285,985
Thereafter...................................................... 10,476,081
-----------
$12,667,600
===========
</TABLE>
(b) CAPITAL LEASE OBLIGATIONS -- The Company leases equipment with cost and
related accumulated depreciation of $259,240 and $56,953, respectively, under
capital leases expiring in various years through 2002. Amortization of assets
under capital leases is included in depreciation expense.
The future minimum annual rentals under the capital leases at September 30,
1995 are as follows:
<TABLE>
<S> <C>
1996............................................................ $ 73,623
1997............................................................ 75,325
1998............................................................ 22,851
1999............................................................ 22,851
2000............................................................ 21,791
Thereafter...................................................... 34,148
--------
Subtotal........................................................ $250,589
Less portion of payments representing interest.................. (37,103)
--------
Present value of lease payments................................. $213,486
========
</TABLE>
(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, 1995,
1994 and 1993 were approximately $408,000, $357,000 and $280,000 respectively.
F-12
<PAGE> 55
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
The provision for income taxes includes the following components:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Federal:
Currently payable............................ $1,866,090 $1,337,356 $ 884,296
Temporary differences --
Revenue received in advance............... -- -- 18,700
Tax depreciation (less) than book
depreciation............................ (26,842) (6,800) (6,561)
State franchise taxes..................... (14,335) (26,520) 2,959
Currently nondeductible expenses.......... (13,720) (42,745) 8,809
Intangible asset amortization............. (155,693) (134,627) --
Other, net................................ 117,224 (5,100) 598
---------- ---------- ----------
1,772,724 1,121,564 908,801
State and local................................ 240,662 201,000 104,116
Foreign........................................ 422,429 219,718 198,987
---------- ---------- ----------
Total provision for income taxes..... $2,435,815 $1,542,282 $1,211,904
========== ========== ==========
</TABLE>
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>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------
1995 1994 1993
----------------- ----------------- -----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Computed provision for income
taxes at statutory rate..... $2,026,375 34.0% $1,354,357 34.0% $1,054,462 34.0%
Increase/(decrease) in taxes
resulting from --
State and local income
taxes, net of federal
income tax effect........ 158,837 2.7 132,660 3.3 68,684 2.2
Foreign taxes............... 154,399 2.6 64,703 1.6 69,453 2.2
Research and experimentation
tax credits.............. -- -- -- -- (4,000) (.1)
Amortization of cost in
excess of net assets
acquired................. 8,033 .1 8,033 .2 8,033 .3
Tax exempt income........... (38,003) (.6) (14,022) (.4) (2,608) (.1)
Foreign Sales Corporation
benefit.................. (34,250) (.6) (18,333) (.4) (2,000) (.1)
Officers Life Insurance..... 22,384 .4 -- -- -- --
Other, net.................. 138,040 2.3 14,884 .4 19,880 .7
---------- ---- ---------- ---- ---------- ----
Actual provision for
income taxes...... $2,435,815 40.9% $1,542,282 38.7% $1,211,904 39.1%
========== ==== ========== ==== ========== ====
</TABLE>
F-13
<PAGE> 56
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax assets were as follows at:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
State income taxes......................................... $ 67,966 $ 60,573
Currently nondeductible expenses........................... 126,663 104,073
Intangible asset amortization.............................. 321,843 173,686
Other...................................................... 135,455 118,283
--------- ---------
Total.............................................. $ 651,927 $ 456,615
--------- ---------
Deferred tax liabilities:
Depreciation............................................... (27,295) (113,845)
Other...................................................... (211,843) --
--------- ---------
Total.............................................. $(239,138) $(113,845)
--------- ---------
Net deferred tax assets............................ $ 412,789 $ 342,770
========= =========
</TABLE>
No valuation allowances are recorded against deferred tax assets or
deferred tax liabilities at September 30, 1995 or 1994.
(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 terms of the plan, the Company will match up to
3% of the employee contributions. Discretionary and matching contributions by
the Company to the plan amounted to approximately $273,000, $270,000, and
$219,000, during 1995, 1994 and 1993, respectively.
(b) STOCK OPTIONS -- At September 30, 1995, 1,431,235 of the authorized but
unissued common shares of the Company were reserved for issuance to directors,
executives, key employees and consultants for stock options. Of the reserved
shares, 773,663 were subject to options outstanding at September 30, 1995.
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.
F-14
<PAGE> 57
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Transactions involving the stock options are shown in the table below:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Outstanding at beginning of period (from $1.05 to
$7.57 per share).................................... 659,715 518,580 395,671
Granted (from $4.69 to $6.42 per share)............... 189,188 185,422 125,413
Expired or canceled................................... (17,817) (8,950) (517)
Exercised*............................................ (57,423) (35,337) (1,987)
------- ------- -------
Outstanding at end of period (from $1.05 to $7.57 per
share).............................................. 773,663 659,715 518,580
======= ======= =======
Exercisable at end of period (from $1.05 to $7.57 per
share).............................................. 353,541 227,136 135,477
======= ======= =======
- ---------------
<FN>
* Includes 14,574 shares surrendered in conjunction with the exercise of stock
options.
</TABLE>
(c) OTHER BENEFITS -- The Company does not provide postretirement or
postemployment benefits to its employees.
(8) QUARTERLY FINANCIAL DATA -- UNAUDITED (Amounts in thousands, except for per
share data)
<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>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED IN FISCAL 1994
-----------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Net sales...................................... $ 3,625 $5,891 $ 5,717 $6,644
Gross profit................................... 2,486 3,557 3,685 4,631
Net earnings................................... 200 610 603 1,028
Primary earnings per common share.............. .01 .05 .05 .09
Cash dividends per common share................ .02 .02 .02 .02
</TABLE>
F-15
<PAGE> 58
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
----------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and short-term investments................................. $ 7,972,093 $ 8,918,637
Accounts receivable, less allowance of $125,792 and $164,136
for doubtful accounts........................................ 7,486,777 6,482,999
Inventories..................................................... 4,195,724 3,032,655
Prepaid expenses and other...................................... 586,703 165,553
Deferred tax assets............................................. 390,062 324,910
----------- -------------
Total current assets......................................... 20,631,359 18,924,754
----------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land............................................................ 276,927 269,217
Building improvements........................................... 5,981,461 6,162,668
Machinery, equipment and furniture.............................. 6,069,077 5,525,455
Construction in progress........................................ 687,187 --
----------- -------------
13,014,652 11,957,340
Less -- Accumulated depreciation and amortization............... 5,230,769 4,816,905
----------- -------------
Net property, plant and equipment............................ 7,783,883 7,140,435
----------- -------------
OTHER ASSETS:
Long-term receivables, including cash surrender value of
insurance policies........................................... 295,387 168,892
Deferred royalties.............................................. 285,459 74,762
Deferred tax assets............................................. 222,879 87,879
Deferred debenture offering costs, net of accumulated
amortization of $133,357..................................... 0 395,731
Covenants not to compete, net of accumulated amortization
of $2,195,478 and $1,827,718................................. 3,325,116 2,432,876
License agreements, net of accumulated amortization of
$815,599 and $772,433........................................ 319,514 362,680
Patents, trade names, customer lists and distributorships, net
of accumulated amortization of $632,059 and $475,762......... 3,486,941 1,837,238
Other intangible assets, net of accumulated amortization of
$117,119 and $85,570......................................... 2,123,881 545,430
Costs in excess of net assets acquired, net of accumulated
amortization
of $611,704 and $458,482..................................... 3,127,817 2,598,511
----------- -------------
Total other assets........................................... 13,186,994 8,503,999
----------- -------------
Total assets................................................. $41,602,236 $ 34,569,188
=========== =============
</TABLE>
F-16
<PAGE> 59
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
----------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable -- Bank............................................ $ 6,218,000 $ 0
Current portion of long-term obligations........................ 361,000 381,932
Current portion of capital lease obligations.................... 107,879 63,561
Accounts payable................................................ 692,447 689,869
Accrued payroll and payroll taxes............................... 649,801 723,946
Other accrued expenses.......................................... 2,187,176 937,348
Income taxes payable............................................ 841,106 458,707
----------- -------------
Total current liabilities.................................. 11,057,409 3,255,363
----------- -------------
LONG-TERM OBLIGATIONS............................................. 1,976,529 12,285,668
----------- -------------
CAPITAL LEASE OBLIGATIONS......................................... 366,398 149,925
----------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 1,000,000 shares authorized; none
issued
Common stock, no par value, 50,000,000 shares authorized;
14,276,638 and 12,924,814 shares issued and outstanding
respectively, stated at...................................... 2,384,854 1,487,159
Additional paid-in capital...................................... 20,498,404 13,895,901
Retained earnings............................................... 5,500,542 3,747,930
Foreign currency translation adjustment......................... (181,900) (252,758)
----------- -------------
Total shareholders' equity................................. 28,201,900 18,878,232
----------- -------------
Total liabilities and shareholders' equity................. $41,602,236 $ 34,569,188
=========== ============
</TABLE>
F-17
<PAGE> 60
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
----------- -------------
<S> <C> <C>
NET SALES......................................................... $20,335,897 $ 18,356,729
COST OF SALES..................................................... 6,196,415 6,079,338
----------- -----------
Gross Profit............................................... 14,139,482 12,277,391
----------- -----------
OPERATING EXPENSES:
Research and development........................................ 1,105,675 1,083,284
Selling and marketing........................................... 4,378,907 3,823,591
General and administrative...................................... 3,064,568 2,850,369
----------- -----------
Total operating expenses................................... 8,549,150 7,757,244
----------- -----------
Operating income........................................... 5,590,332 4,520,147
----------- -----------
OTHER INCOME (EXPENSE):
Licensing and commission fees................................... 41,846 92,806
Investment income............................................... 339,648 306,904
Interest expense and amortization of debt expenses.............. (307,792) (857,268)
Other, net...................................................... 197,532 (25,949)
Currency gains/(losses)......................................... -- --
----------- -----------
Total other income (expense)............................... 271,234 (483,507)
----------- -----------
Earnings before income taxes............................... 5,861,566 4,036,640
INCOME TAXES...................................................... 2,378,393 1,676,023
----------- -----------
Net earnings............................................... $ 3,483,173 $ 2,360,617
=========== ===========
PRIMARY WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING...... 14,136,623 12,312,687
=========== ===========
PRIMARY EARNINGS PER COMMON SHARE................................. $ .25 $ .19
=========== ===========
FULLY DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES............ 14,794,029 N/A
=========== ===========
FULLY DILUTED EARNINGS PER COMMON SHARE........................... $ .24 N/A
=========== ===========
</TABLE>
F-18
<PAGE> 61
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF CUMULATIVE
COMMON FOREIGN
SHARES ADDITIONAL CURRENCY
ISSUED AND COMMON PAID-IN RETAINED TRANSLATION
OUTSTANDING STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1995......................... 12,924,814 $1,487,159 $13,895,901 $ 3,747,930 $ (252,758) $18,878,232
Net earnings................... -- -- -- 3,483,173 -- 3,483,173
Cash dividends paid............ -- -- (1,730,561) -- (1,730,561)
Exercise of stock options...... 33,940 14,352 74,746 -- -- 89,098
Other awards................... 172 117 1,479 -- -- 1,596
Debenture conversion, net...... 1,317,712 883,226 6,526,278 -- -- 7,409,504
Foreign currency translation
adjustment................... -- -- -- -- 70,858 70,858
----------- ---------- ----------- ---------- --------- -----------
Balance at June 30, 1996....... 14,276,638 $2,384,854 $20,498,404 $ 5,550,542 $ (181,900) $28,201,900
=========== ========== =========== ========== ========= ===========
</TABLE>
F-19
<PAGE> 62
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
----------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................................... $ 3,483,173 $ 2,360,617
Noncash items --
Loss on disposal of fixed assets............................. 13,771 --
Amortization of royalties.................................... 26,803 --
Depreciation of property, plant and equipment................ 741,808 718,067
Amortization of intangible assets............................ 767,879 705,079
Deferred interest expense.................................... 121,221 41,660
Deferred income taxes........................................ (200,152) (312,830)
Long term receivables........................................ (126,495) (211,477)
Changes in other current assets and current liabilities --
Accounts receivable, net..................................... (1,003,778) (887,015)
Inventories.................................................. (333,069) (862)
Prepaid expenses and other................................... (421,150) (193,059)
Accounts payable............................................. 2,578 (1,098,367)
Accrued expenses............................................. 1,175,683 912,749
Income taxes payable......................................... 448,779 (150,015)
----------- -------------
Net cash provided by operating activities.................. 4,697,051 1,884,547
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment acquired, net..................... (1,198,829) (1,859,348)
Royalty advanced................................................ (37,500) --
Product line acquisition --
Royalty advanced............................................. (200,000) --
Inventory and equipment...................................... (1,030,000) --
Covenant not to compete...................................... (1,260,000) --
Patents, tradenames, customer list and other assets.......... (3,416,000) --
Cash in excess of net assets acquired........................ (682,527) --
----------- -------------
Net cash used for investing activities..................... (7,824,856) (1,859,348)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term obligations.............................. (2,834,533) (282,808)
Proceeds from long-term obligations............................. 511,032 1,407,334
Dividends paid.................................................. (1,730,561) (895,289)
Proceeds from issuance of common stock, net..................... (53,535) 40,918
Effect of exchange rate changes on cash......................... 70,858 (18,215)
Proceeds from bank line of credit............................... 6,218,000 --
----------- -------------
Net cash provided by (used for) financing activities....... 2,181,261 251,940
----------- -------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS........ (946,544) 277,139
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD............ 8,918,637 8,831,983
----------- -------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD.................. $ 7,972,093 $ 9,109,122
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for --
Income taxes................................................. $ 1,883,196 $ 2,110,761
========== ==========
Interest..................................................... $ 111,637 $ 538,145
========== ==========
Non-cash activities --
Common stock issued from conversion of subordinated
debentures, net of amortization of deferred debenture
offering costs.............................................. $ 7,409,504 $ 160,000
Cashless exercise of stock option............................ $ 66,380 --
</TABLE>
F-20
<PAGE> 63
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statements included herein have not been
examined by independent public accountants, but include all adjustments
(consisting of normal recurring entries) which are, in the opinion of
management, necessary for a fair presentation of the results for such periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to the requirements of the Securities and Exchange
Commission, although the Company believes that the disclosures included in these
financial statements are adequate to make the information not misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-K.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the year.
(2) INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
---------- -------------
<S> <C> <C>
Raw materials.............................................. $1,167,568 $ 1,165,319
Work-in-process............................................ 1,000,459 626,077
Finished goods............................................. 2,027,697 1,241,259
---------- ------------
$4,195,724 $ 3,032,655
========== ===========
</TABLE>
(3) INCOME TAXES
The provisions for income taxes were computed at the estimated annualized
effective tax rates utilizing current tax law in effect, after giving effect to
research and experimentation credits.
(4) EARNINGS PER COMMON SHARE
Net earnings per share has been computed based upon the weighted average
number of shares outstanding during the periods including the effect of the
conversion of the subordinated debentures into common stock. All share and per
share information has been adjusted to reflect the 3 for 2 stock split in
October 1995. Additionally, all share and per share information has been
adjusted for a 3% stock dividend in November 1994.
(5) TRANSLATION OF FOREIGN CURRENCY
Assets and liabilities of foreign operations are translated using
quarter-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.
(6) RECLASSIFICATIONS
Certain reclassifications have been made to the accompanying financial
statements to conform to the June 30, 1996 presentation.
F-21
<PAGE> 64
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(7) ACQUISITIONS
On June 24, 1996 the Company acquired the enteric product line of Cambridge
Biotech Corporation for approximately $6,588,000. The purchase price was
allocated as follows:
<TABLE>
<S> <C>
Inventory.............................................................. $ 830,000
Fixed Assets........................................................... 200,000
Advanced Royalty....................................................... 200,000
Covenant Not to Compete................................................ 1,260,000
Customer List.......................................................... 1,090,000
Supply Agreement....................................................... 218,000
Patents Trademarks..................................................... 498,000
Manufacturing Procedures............................................... 1,610,000
Cost in Excess of Net Assets Acquired.................................. 682,000
----------
Total........................................................ $6,588,000
==========
</TABLE>
The total purchase price included cash paid to Cambridge Biotech
Corporation, of $6,351,000, expenses of $125,000 and accrued royalties of
$112,000. As additional consideration, Meridian agreed to pay Cambridge a
royalty of 2% on product sales for a five year period beginning June 24, 1996.
Included in the $6,351,000 is an advanced payment of $200,000 on such royalties.
The remaining estimated royalty has been accrued at its present value. Also
included in the $6,351,000 is an amount accrued as of June 30, 1996 for
inventory of $651,000 which was paid on July 23, 1996. Intangible assets
acquired will be amortized over periods ranging from 5 to 15 years.
F-22
<PAGE> 65
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN
THE DEBENTURES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY THE DEBENTURES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 3
Risk Factors.......................... 7
Capitalization........................ 10
Use of Proceeds....................... 10
Dividend Policy....................... 11
Price Range of Common Stock........... 12
Selected Consolidated Financial
Data................................ 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Business.............................. 20
Management............................ 30
Description of Debentures............. 32
Description of Capital Stock.......... 37
Underwriting.......................... 39
Legal Matters......................... 40
Experts............................... 40
Glossary of Selected Terms............ 41
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$20,000,000
MERIDIAN DIAGNOSTICS, INC. LOGO
7% CONVERTIBLE SUBORDINATED
DEBENTURES DUE 2006
-------------------------
PROSPECTUS
-------------------------
RONEY & CO. LOGO
September 24, 1996
------------------------------------------------------
------------------------------------------------------
