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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________
TO ____________.
Commission File No. 0-14902
MERIDIAN DIAGNOSTICS, INC.
Incorporated under 3471 River Hills Drive IRS Employer ID
the Laws of Ohio Cincinnati, Ohio 45244 No. 31-0888197
Phone: (513) 271-3700
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES NO
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X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this Chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates is $90,046,000
based on a closing sale price of $10.00 per share on December 12, 1997. As of
December 12, 1997, 14,371,932 shares of no par value Common Stock were issued
and outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Shareholders for 1997 furnished to
the Commission pursuant to Rule 14a-3(b) and portions of the Registrant's Proxy
Statement filed with the Commission for its 1998 Annual Meeting are incorporated
by reference in Parts II and III as specified.
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MERIDIAN DIAGNOSTICS, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
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Page
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Part I
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Item 1 - Business 3
Item 2 - Properties 16
Item 3 - Legal Proceedings 16
Item 4 - Submission of Matters to a Vote of Security Holders 16
Part II
Item 5 - Market for Registrant's Common Equity
and Related Stockholder Matters 17
Item 6 - Selected Financial Data 17
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 8 - Financial Statements and Supplementary Data 18
Item 9 - Disagreements on Accounting and Financial Disclosure 19
Part III
Item 10 - Directors and Executive Officers of the Registrant 19
Item 11 - Executive Compensation 19
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 19
Item 13 - Certain Relationships and Related Transactions 19
Part IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 19
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PART I.
ITEM 1.
BUSINESS
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GENERAL
The Company develops, manufactures and markets a broad range of
innovative, disposable diagnostic test kits and related diagnostic products used
for the rapid diagnosis of infectious diseases. These products provide accuracy,
simplicity, and speed, and enable early diagnosis and treatment of common
medical conditions such as gastrointestinal, urinary tract and respiratory
infections. All of the Company's products are used in procedures performed in
vitro (outside the body) and enhance patient well-being while reducing total
outcome costs of healthcare.
The Company's product development strategy is to combine existing
technologies with new product designs both through internal product development
and through product acquisitions, licensing or supply arrangements. Internal
product development activities focus on the development or enhancement of
immunodiagnostic technologies and applications to simplify, accelerate or
increase the accuracy of diagnoses of certain infectious diseases. Since 1991,
the Company has also acquired or obtained rights to distribute a number of
products and technologies.
The Company utilizes its resources to serve each of the strategic
domestic and international medical markets it has targeted: hospital networks
and clinical and hospital laboratories; alternate site markets, including
physicians' offices, outpatient clinics, nursing homes and health maintenance
organizations (HMOs); and new markets, including veterinary laboratories, water
treatment facilities and consumer self-testing. The Company markets
approximately 100 products representing five major disease states through a
direct sales force in the U.S. and Italy, supplemented by a network of national
and international distributors. International sales in approximately 60
countries were 29% of total fiscal 1997 sales, with about 67% of international
sales originating in Western Europe. The majority of the remaining international
sales were to Canada, Mexico and the Pacific Rim.
ACQUISITION STRATEGY
An important facet of the Company's long-term business strategy is the
acquisition, licensing or entrance into supply arrangements to obtain innovative
diagnostic testing technologies, product formats and products that complement
its existing operations and address the needs of the Company's existing and
targeted customer base. Historically, Company management has pursued the
acquisition and licensing of products and technologies that fit the Company's
niche diagnostic test markets, which are characterized by a large number of
users. Examples of this strategy include the acquisitions of the mononucleosis
and infectious disease
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product lines in fiscal 1993 and 1994 respectively from Johnson & Johnson for
approximately $3.4 million each, the June 1996 acquisition of the enteric
product line of Cambridge Biotech Corporation for approximately $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.
June 1996 Acquisition
On June 24, 1996, the Company acquired the enteric product line of
Cambridge Biotech Corporation. The line consists of diagnostic products which
identify Adenovirus, Rotavirus, C. difficile and Lyme disease, all of which are
enzyme immunoassay microtiter formats, similar to the Company's existing Premier
products. This line consists of the branded products Adenoclone(R),
Rotaclone(R), Cytoclone(TM) and a product for the detection of Lyme disease.
Along with the Company's Meritec(TM) and ImmunoCard(R) products, the addition of
Rotaclone and Adenoclone makes the Company an industry leader in the pediatric
diarrhea diagnostic market. Cytoclone is the first direct test available for the
detection of the C. difficile Toxin B. The Lyme disease diagnostic test is a
complementary product offering in the Company's parasitic disease area.
The Company paid Cambridge Biotech Corporation $6,566,000 million in
cash for the acquired enteric product line and related rights and assets, which
purchase price was allocated to: an advance on royalties of $200,000; inventory
valued at $830,000; fixed assets valued at $200,000 and intangibles valued at
$5,336,000. The Company also assumed certain royalty obligations of Cambridge
Biotech Corporation.
The acquired products are being 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 74% of the acquired products were sold in the U.S. during 1997.
IMMUNODIAGNOSTICS OVERVIEW
In vitro diagnostic testing is the process of analyzing constituents of
blood, urine, stool, other body 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.
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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.
Alternatively, certain tests employ the antigen to detect the presence of
an antibody.
MARKET TRENDS
The global market for infectious disease tests continues to expand as
new disease states are identified, new therapies become available and worldwide
standards of living and access to healthcare improve. More importantly, within
this market there is a continuing shift from conventional testing, which
requires highly trained personnel and lengthy turnaround times for test results,
to more technologically advanced testing which can be performed and completed in
minutes or hours by less highly trained personnel.
Technological advances permitting accurate testing to occur outside the
traditional hospital or laboratory setting have also affected the market for
diagnostic products. These technological developments have contributed to the
emergence of alternate site markets, such as physicians' offices, outpatient
clinics, nursing homes and HMOs, as important diagnostic market segments. These
technological advances should also contribute to the development of new markets
for the Company's products, including veterinary laboratories, water treatment
facilities and consumer self-testing in the over-the-counter market.
The increasing pressures to contain total healthcare costs have
accelerated the increased use of diagnostic testing and the market shift to
alternate sites. With rapid and accurate diagnoses of infectious diseases,
physicians can pinpoint appropriate therapies quickly, leading to faster
recovery, shorter hospital stays and less treatment expense. In addition, these
pressures have led to a major consolidation among reference laboratories and the
formation of multi-hospital alliances that have reduced the number of
institutional customers for diagnostic products and resulted in changes in
buying practices. Specifically, multi-year exclusive or primary source marketing
or distribution contracts with institutional customers have become more common,
replacing less formal distribution arrangements of shorter duration and
involving lower product volumes.
STRATEGY
The Company continues to execute its long-term strategy consisting of
the following elements:
- Developing New Product Applications from Core Technologies and
Formats. The Company employs a market-driven product
development strategy to adapt or enhance diagnostic testing
technologies and product formats in response to newly
identified disease states and customer demands for
improvements in product
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accuracy, simplicity, speed and cost-efficiency. The Company
accomplishes this by monitoring existing markets, interacting
closely with its customers and recognizing emerging diseases
and therapies. Since 1991, the Company has developed and
introduced 25 internally developed products.
- Acquiring and Licensing Products and Technology. The Company
intends to acquire, license or enter into supply arrangements
to obtain innovative diagnostic testing technologies, product
formats and products that complement its existing operations
and address the needs of the Company's existing and targeted
customer base. Management regularly identifies and reviews
opportunities through its broad industry contacts and
recognized position in the industry. Since 1991, the Company
has acquired, licensed or entered into supply arrangements
relating to 33 products, five of which were acquired in June
1996 from Cambridge Biotech Corporation.
- Increasing International Sales. The Company has targeted
international sales as an attractive source of growth. The
Company has developed a strong presence in Italy through its
Italian subsidiary, Meridian Diagnostics Europe s.r.l.
("MDE"), added management to expand its ability to serve Latin
American markets and to strengthen its distribution channels
into the European market. Over the last five years, the
Company's international sales have grown from $2.1 million in
fiscal 1992 to $10.3 million in fiscal 1997 and represented
29% of total consolidated sales in fiscal 1997.
- Developing Partnerships With Consolidated Healthcare
Organizations. The Company seeks to develop strategic
partnerships with the major reference laboratories and other
consolidated healthcare providers. The Company believes it is
in a position to develop partnerships because it is an
integrated manufacturer, has a broad product line, offers
tests in multiple formats, and is willing to invest resources
in building relationships and facilitating open communications
with those large customers. In January 1996, the Company
signed a three-year exclusive agreement with a major hospital
alliance of approximately 350 hospitals for the Company to
provide all parasitology transport products and specific
infectious disease diagnostic products. In April 1996, the
Company signed a three-year, primary source agreement with a
major reference laboratory chain consisting of over 35
laboratories for the supply of certain products for
parasitology, virology and other infectious diseases. During
1997 several additional exclusive three-year contracts were
signed with other consolidated healthcare providers.
- 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
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for toxigenic E. coli, a bacteria found in inadequately cooked
meats as well as many other food products. In August 1997, the
Company announced the launch of a rapid test for the detection
of E. coli O157:H7 in food, co-developed with a major U.S.
research center. 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.
- Accessing Alternate Site Markets for Diagnostic Testing. The
Company seeks strong licensing/distribution partners having
sales and marketing strengths to enable them to promote more
effectively the Company's products into alternate site
markets. The Company believes that its products are readily
adaptable for use in alternate site markets. In September
1997, the Company entered into an exclusive distribution
agreement with a third party which through its representatives
will distribute the Company's urinary tract infection product,
as well as other rapid tests, to the physician office market.
The Company continues to evaluate the suitability of certain
of its other products for the consumer market.
PRODUCTS
The Company has expertise in the development and manufacture of
products based on multiple core diagnostic technologies, each of which enables
the visualization and identification of antigen/antibody reactions for specific
pathogens. As a result, the Company is able to develop and manufacture
diagnostic tests in a variety of formats that satisfy customer needs and
preferences, whether in a hospital, commercial or reference laboratory or
alternate site location. These technologies include enzyme immunoassay,
immunofluorescence, particle agglutination, membrane filtration/concentration,
immunodiffusion, complement fixation and chemical stains.
Enzyme Immunoassay (EIA). Products incorporating the EIA technology
achieve extremely high levels of accuracy in detecting disease-related antigens
or antibodies through the use of special color-based enzyme-substrate reactions.
The Company utilizes this technology in its multiple test format - Premier --
for large volume users, and in its single test formats - ImmunoCard(R) and
Monolert(TM) -- 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(R) 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(TM), MeriStar(R) and MonoSpot(R) products.
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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(R) 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(R) and Macro-CON(R).
The Company's product line consists of nearly 100 medical diagnostic
products representing five major disease states. Currently, the most important
product lines from the perspective of sales are products to diagnose
gastrointestinal and parasitic diseases. The Company's products generally range
in list price from $1 per test to $25 per test. A discussion of Company's key
products and their competitive advantage appears in the following table:
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<TABLE>
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INFECTIOUS DISEASE CATEGORY KEY PRODUCT(S) PRODUCT APPLICATION
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PARASITIC DISEASES
- - Giardiasis
- - Cryptosporidiosis Para-Pak(R), Premier, Products for the diagnosis and collection,
- - Amebiasis Para-Pak ULTRA, Para-Pak PLUS, preservation, transportation and concentration
- - Lyme Disease Macro-CON, Merifluor(R) of parasites.
- ------------------------------------- --------------------------------------- ----------------------------------------------------
GASTROINTESTINAL DISEASES
- - Stomach Ulcers (H. pylori) Premier, ImmunoCard(R), U.S. patients make 20 million annual visits to
Premier Platinum(R) 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
ImmunoCard STAT!(TM) infects undercooked food and can cause kidney
failure.
- - Antibiotic-associated Diarrhea Premier,ImmunoCard(R), Toxin producing strains of C. difficile can cause
(C.difficile) Meritec(TM), Cytoclone PMC (pseudomembranous colitis) that results
in rapid colon degeneration.
- - Pediatric Diarrhea (Rotavirus, ImmunoCard(R), Meritec(TM), These viral diseases, which cause rapid
Adenovirus) Rotaclone(R), Adenoclone(R) dehydration, are transmitted rapidly through
ImmunoCard STAT!(TM) pediatric populations in hospitals, schools
and daycare settings.
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RESPIRATORY DISEASES
- - Pneumonia (Mycoplasma ImmunoCard(R), MeriStar(R) Pneumonia is the fifth leading cause of death
pneumoniae) worldwide, 20% of which is caused by
Mycoplasma pneumoniae
- - Valley Fever (Coccidioides immitis) Premier Fungal pathogens can cause flu-like illness
and/or severe pneumoniae, that are life-
threatening in AIDS and other immuno-
compromised patients.
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UROGENITAL DISEASE
- - Urinary Tract Infection FiltraCheck-UTI(R) In the U.S., 65 million cultures are performed
yearly to detect potential urinary tract infection.
- - Chlamydia Premier, Merifluor(R) Chlamydia is the leading sexually transmitted
disease.
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VIRAL DISEASES
- - Infectious Mononucleosis ImmunoCard(R),Monolert(TM), Infectious mononucleosis, a viral disease common
MonoSpot(R) Latex, among young adolescents, is transmitted easily
from person-to-person.
- - Herpes simplex Virus (HSVI and Premier Oral Herpes infections affect up to 80% of
HSVII) certain populations. Genital Herpes and can be
life-threatening to newborns.
- - Cytomegalovirus Merifluor(R) Cytomegalovirus infections are potentially
deadly in transplant procedures and among
immunocomprised blood recipients.
- - Varicella-Zoster virus Merifluor(R) Varicella-Zoster virus is the cause of chicken
pox and shingles.
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<TABLE>
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COMPETITIVE ADVANTAGE MARKET
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Leading supplier of parasitology diagnostics. In October 1995, - Hospital Laboratories
introduced two products that resulted in easier processing, safer - Reference Laboratories
handling and reduced procecessing time of the specimen and lower - Veterinary Laboratories
cost disposal of transport container.
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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 diagnoses - Veterinary Laboratories
utilizing patient blood serum. The Company is the only manufacturer - State Health Laboratories
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 quick results which are critical in preventing
the spread of these highly infectious viruses.
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The Company provides the broadest range of diagnostic reagents for - Hospital Laboratories
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.
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The product allows for rapid screening for the presence of urinary - Hospital Laboratories
tract infection. Therapy can be rapidly administered, often while - References Laboratories
the patient is still in the physicians office. - Physicians' Office Laboratories
- Consumer (pending)
Both product formats enable rapid, accurate testing. - Public Health Laboratories
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The Company provides a broad range of innovative technologies - Hospital Laboratories
including Monolert(TM) which use synthetic peptides to detect - Reference Laboratories
the virus which causes mononucleosis. - Physicians' Office Laboratories
- Student Health Laboratories
Premier HSV Plus detects both HSVI and HSVII rapidly from a variety
of body sites.
Quickly detects "immediate early antigen" in a rapid, direct fluorescence
format.
Quickly detects the virus that causes chicken pox in a rapid, direct
Fluorescence format.
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MARKETING AND SALES
The Company's marketing efforts are focused on a continual process of
seeking ways to assist healthcare providers in improving outcomes for patients
exposed to serious infectious diseases. Rapid, accurate diagnosis can mean
faster recovery, shorter hospital stays and less expense, both for the patient
and the healthcare system.
The Company believes that its marketing goals are best served by
forming partnerships with key customers to develop concepts for future products
and technology applications. These partnerships facilitate close customer
interaction, including product strategy sessions and co-marketing programs.
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 national sales manager, three regional sales managers, two inside sales
representatives and 20 technical sales representatives. Where the Company
utilizes distributors, the Company participates in selling efforts involving key
customers. In Italy, the Company's direct sales force consists of a director of
sales, two product specialists and six technical sales representatives, as well
as an international sales manager who is responsible for all European
distributor activities outside of Italy.
The Company's sales and marketing efforts in Europe, North Africa and
the Middle East are managed through MDE's European headquarters in Milan, Italy.
MDE's strategy has been to appoint one or two distributors in each of the
countries in its targeted markets, and to maintain a direct sales organization
within Italy. The Company has about 60 independent distributors in approximately
60 foreign countries including key distributor relationships in Canada, Central
and South America, Mexico, Australia, New Zealand and the Pacific Rim, which are
managed directly from the United States by an international manager.
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RESEARCH AND DEVELOPMENT
The Company's research and development activities focus on developing
new and improved diagnostic solutions. Working in conjunction with the marketing
department, the Company's research and development department focuses its
activities on enhancements to, and new applications for the Company's
technologies. Over the past six years Meridian has developed internally 25 new
products. At present, patents are pending on two recent additions to our product
line. The research and development department has access to a number of
diagnostic technologies, each of which can be applied to meet new product
specifications that marketing has established. The Company's product development
staff are experts in binding various biological materials to numerous solid
phases, including plastics, membranes, latex beads, immuno-fluorescent dyes and
immunogold to develop testing formats. The Company believes that its proprietary
know-how and technologies in these areas enable it to develop products that have
longer shelf-lives and provide improved performance and quicker test results.
The research and development department initiates the Company's quality
process through its technology transfer mechanism which begins the establishment
of manufacturing standards. By working closely with the manufacturing
department, the same standards can be imposed to ensure consistently
high-quality products. The Company estimates that it takes approximately 18 to
24 months from the conceptualization of a product to its marketing.
The research and development department includes the Vice President of
Research and Development and 15 research scientists. The disciplines represented
in the group include biochemistry, immunology, mycology, bacteriology, virology
and parasitology. In fiscal 1995, fiscal 1996 and fiscal 1997, the Company spent
$1,432,000, $1,499,000 and $1,502,000, respectively, on its research and
development activities.
CUSTOMERS
The principal customers for the Company's products are hospitals,
commercial and reference laboratories, alternate site markets, such as
physicians' offices, outpatient clinics, nursing homes and HMOs, and new
markets, such as veterinary laboratories, water treatment facilities and
consumer self-testing. No end-use customer comprised more than 5% of the
Company's sales in fiscal 1997. Two distributors together accounted for
approximately 33% of the Company's fiscal 1997 sales. However, the Company does
not believe that the loss of either of these distributors would have a material
adverse effect on the Company because of its ability to sell to the end-use
customers served by these distributors through alternative means.
MANUFACTURING
The Company's manufacturing is performed at its Cincinnati, Ohio
facility. All manufacturing operations are regulated by, and in compliance with,
FDA-mandated Good Manufacturing Practices for medical devices. To maintain the
highest quality standards, the Company utilizes both external and internal
quality auditors who routinely evaluate the Company's manufacturing processes.
The Company's immunodiagnostic products require the
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production of highly specific and sensitive antigens and antibodies. The Company
produces substantially all of its own requirements including: monoclonal
antibodies, polyclonal antibodies, 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. The Company believes it has
sufficient manufacturing capacity for anticipated growth.
COMPETITION
The market for diagnostic tests is a multi-billion dollar international
industry which is highly competitive. Many of the Company's competitors are
larger with greater financial, research, manufacturing, and marketing resources.
Important competitive factors of the Company's products include product quality,
price, ease of use, customer service and reputation. In a broader sense,
industry competition is based upon scientific and technological capability,
proprietary know-how, access to adequate capital, the ability to develop and
market products and processes, the ability to attract and retain qualified
personnel and the availability of patent protection. To the extent that the
Company's product lines do not reflect technological advances, the Company's
ability to compete in those product lines could be adversely affected.
Companies competing in the diagnostic test industry generally focus on
a limited number of tests or limited segments of the market. As a result, the
diagnostic test industry is highly fragmented and segmented. Hundreds of
companies in the United States alone supply immunodiagnostic tests. These
companies range from multi-national healthcare companies, for which
immunodiagnostics is one line of business, to small start-up companies. Of
central importance in the industry are mid-sized medical diagnostic specialty
companies, like the Company, that offer multiple, broad product lines and have
the ability to deliver high value new products quickly to the marketplace. Among
the companies with which the Company competes in the marketing of one or more of
its products are Abbott Laboratories Inc., Becton, Dickinson and Company,
Diagnostic Products Corporation, QUIDEL Corporation and Wampole Laboratories
Division of Carter-Wallace, Inc.
INTELLECTUAL PROPERTY, PATENTS AND LICENSES
The Company typically does not seek patent protection for its products
and instead strives to maintain the confidentiality of its proprietary know-how.
The Company owns or licenses U.S. and foreign patents for 20 of its products.
The patents or licenses for these products were acquired in connection with the
purchase of the products or the licensing of the technology on which the
products are based. In the absence of patent protection, the Company may be
vulnerable to competitors who successfully replicate the Company's production
and manufacturing techniques and processes. The Company's laboratory and
research personnel are required to execute confidentiality agreements designed
to protect the Company's proprietary products.
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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 Food & Drug Administration ("FDA") as "devices" pursuant to the Federal
Food, Drug and Cosmetic Act (the "FDCA"). Under the FDCA, medical devices are
classified into one of three classes (i.e., Class I, II or III). Class I and II
devices are not expressly approved by the FDA, but, instead, are "cleared" for
marketing. Class III devices generally must receive "pre-market approval" from
the FDA as to safety and effectiveness.
A 510(k) clearance will be granted if the submitted data establishes
that the proposed device is "substantially equivalent" to an existing Class I or
Class II medical device or to a Class III medical device for which the FDA has
not required pre-market approval. The 510(k) clearance process for
"substantially equivalent" devices allows product sales to be made after the
filing of an application and upon acknowledgment by the FDA, typically within 90
to 120 days after submission. If the FDA requests additional information, the
product cannot be sold until the application has been supplemented and upon
acknowledgment by the FDA within 90 to 120 days of the supplemental application.
In practice, the FDA has been granting clearance in about 30 days following
submission of the supplemental information. 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.
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. Currently, the Company is
supporting foreign product registrations in Japan for its ImmunoCard products
via a Japanese distributor.
Other Approvals. The Company intends to seek appropriate certifications
and approvals to enable the Company to market immunodiagnostic tests for
toxigenic E. coli and E coli O157:H7 in both food products and animals. The
Company has no direct experience in obtaining these certifications and
approvals, but the Company believes the time required and applicable procedures
will be similar to those required for FDA approval. However, there is no
assurance that the Company will receive these certifications and approvals.
14
<PAGE> 15
The Clinical Laboratory Improvement Act of 1988 prohibits laboratories
from performing in vitro tests for the purpose of providing information for the
diagnosis, prevention or treatment of any disease or impairment of, or the
assessment of, the health of human beings unless there is in effect for such
laboratories a certificate issued by the U.S. Department of Health and Human
Services applicable to the category of examination or procedure performed.
Although these certificates are required only for the Company's laboratory
customers (but not for the Company itself) the Company considers the
requirements of The Clinical Laboratory Improvement Act of 1988 in the design
and development of its products.
The Company is an exempt small quantity generator of hazardous waste
and has a U.S. Environmental Protection Agency identification number. All
hazardous waste is manifested and disposed of properly. The Company is in
compliance with the applicable portions of the Federal and state hazardous waste
regulations and has never been a party to any environmental proceeding.
EMPLOYEES
As of November 15, 1997, the Company had 181 full-time employees,
including 49 in sales, marketing and technical support, 88 in manufacturing, 15
in research and product development and 29 in administration and finance.
Sixty-eight of the Company's employees hold scientific degrees.
The Company maintains a Savings and Investment Plan for its U.S.
employees and has established stock option plans for its officers, directors and
employees. A stock purchase plan was established on October 1, 1997 for all
employees.
None of the Company's employees is represented by a labor organization
and the Company is not a party to any collective bargaining agreement. The
Company has never experienced any strike or work stoppage and considers its
relationship with its employees to be excellent.
THE YEAR 2000 ISSUE
The Company completed a major upgrade of its computer hardware and
software applications in November 1997 and believes its internal systems are
year 2000 compliant. The Company has also been assured by its primary commercial
bank of compliance with the year 2000.
The Company has transactions with over 2500 customers and several
hundred suppliers. While there has been activity to date with customers who
interact electronically, it is not feasible to state that all of the above are,
or will be, in compliance with the year 2000 issue. The Company has initiated an
internal effort to assess this situation regarding the external contacts,
however, does not believe that the year 2000 will have a material impact on the
Company.
15
<PAGE> 16
ITEM 2.
PROPERTIES
----------
The Company's corporate offices, manufacturing facility and research
and development facility are located in two buildings totaling 75,000 square
feet on 4.1 acres of land in a suburb of Cincinnati. These properties are owned
by the Company. The Company believes these facilities are in good condition,
well maintained and suitable for its long-term needs.
The Company completed construction of a new warehouse in October 1994
and additional manufacturing and administrative space in September 1995.
In October 1995, the Company commenced renovation of its former
administrative offices and laboratory manufacturing space. This phase, which
cost approximately $1.6 million, was completed in December 1996.
The Company believes its manufacturing and laboratory facilities are in
compliance with all applicable rules and regulations and are maintained in a
manner consistent with FDA-mandated Good Manufacturing Practices.
MDE conducts its operations in a two-story building in the Milan, Italy
area consisting of approximately 18,000 square feet. This facility is owned by
MDE. The Company believes these facilities are in good condition, well
maintained and suitable for MDE's long-term operations.
ITEM 3.
LEGAL PROCEEDINGS
-----------------
Management is not aware of any pending or threatened litigation, claims
or assessments, asserted or unasserted, against Meridian.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
16
<PAGE> 17
PART II.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------
"Common Stock Information" on page 24 and "Quarterly Financial Data" on
page 9 of the Registrant's Annual Report to Shareholders for 1997 are
incorporated herein by reference. There are currently no restrictions on cash
dividend payments.
The Company follows a cash dividend policy consisting of regular
quarterly dividends and special year-end dividends. The Board has set a targeted
payout ratio of 45% to 55% of annual net earnings. Approximately 30% to 35% of
forecasted annual net earnings is intended to be paid in regular quarterly
dividends with any balance being paid as a year-end special dividend. All or a
portion of the year-end dividend may be paid in stock. The declaration and
amount of dividends are determined by the Board of Directors in its discretion
based upon its evaluation of earnings, cash flow requirements and future
business developments. There is no assurance that dividends will continue.
On January 23, 1997, the Company increased its quarterly dividend rate
from $0.035 to $0.0425 per share. The Company paid a dividend of $0.0425 per
share for each quarter of fiscal 1997. On November 19, 1997, the Company
declared a special fiscal 1997 year-end dividend of $0.025 per share payable
December 8, 1997 to shareholders of record on November 28, 1997. Also, on
November 19, 1997, the Board stated its intention to increase the regular
quarterly dividend rate from $0.0425 to $0.0500 per share for fiscal year 1998.
The Company paid a $0.0267 per share dividend in the first quarter of
fiscal 1996 and a $0.035 per share dividend for each other quarter of fiscal
1996. On December 6, 1996, the Company also paid a special fiscal 1996 year-end
dividend of $0.025 per share.
ITEM 6.
SELECTED FINANCIAL DATA
-----------------------
"Ten Year Summary" on page 23 of the Registrant's Annual Report to
Shareholders for 1997 is incorporated by reference. Long-term obligations,
including current maturities, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$20,581,193 $20,722,700 $12,881,086 $15,051,338 $12,811,558
</TABLE>
17
<PAGE> 18
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing on page 10 of the Registrant's Annual Report
to Shareholders for 1997 is incorporated herein by reference.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
"Quarterly Financial Data" on page 9 of the Registrant's Annual Report
along with the Consolidated Financial Statements of the Registrant shown on
pages 13 through 22 of its Annual Report to Shareholders for 1997, are
incorporated herein by reference:
Consolidated Balance Sheets as of September 30, 1997 and 1996.
Consolidated Statements of Earnings for the years ended September 30,
1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended September 30,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
The following schedules are filed herewith:
<TABLE>
<CAPTION>
Schedule
No. Description Page
--- ----------- ----
<S> <C> <C>
Report of Independent Public Accountants. 24
II. Valuation and Qualifying Accounts for the years ended
September 30, 1997, 1996 and 1995. 25
</TABLE>
18
<PAGE> 19
All other supplemental schedules are omitted due to the absence of
conditions under which they are required or because the information is shown in
the Consolidated Financial Statements or Notes thereto.
ITEM 9.
DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
----------------------------------------------------
None.
PART III
Items 10., 11., 12., and 13. of Part III are incorporated by reference
to the Registrant's Proxy Statement for its 1998 Annual Shareholders' Meeting to
be filed with the Commission pursuant to Regulation 14A.
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) (1) and (2) FINANCIAL STATEMENTS AND SCHEDULES.
All financial statements and schedules required to be filed by Item 8
of this Form and included in this report have been listed previously under Item
8. No additional financial statements or schedules are being filed since the
requirements of paragraph (d) under Item 14 are not applicable to the Company.
(a) (3) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit Filing Status
-------------- ---------------------- -------------
<S> <C> <C>
3.1 Articles of Incorporation, including a
amendments
3.2 Code of Regulations b
4 Indenture between the Company and Star c
Bank, National Association, as Trustee,
relating to the Company's 7% Convertible
Subordinated Debentures due 2006
10.1 First Refusal Agreement b
10.2 Amendment to the First Refusal Agreement d
10.3 License Agreement dated October 6, 1983 b
with Marion Laboratories, Inc.
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C> <C>
10.5 Sublicense Agreement dated June 17, 1993 e
among Johnson & Johnson, the Scripps
Research Institute and the Company
Concerning certain Patent Rights
10.6 Assignment dated June 17, 1993 from e
Ortho Diagnostic Systems Inc. to the
Company concerning certain Patent Rights
10.7 Agreement dated January 24, 1994 between f
Meridian Diagnostics, Inc. and Immulok,
Inc.
10.8 Asset Purchase Agreement dated June 24, g
1996 between Cambridge Biotech
Corporation and Meridian Diagnostics, Inc.
MANAGEMENT COMPENSATORY CONTRACTS:
10.9 Savings and Investment Plan, as amended h
10.10 Savings and Investment Plan Trust i
10.11 1986 Stock Option Plan j
10.12 1990 Directors' Stock Option Plan k
10.13 1994 Directors' Stock Option Plan l
10.14 1996 Stock Option Plan n
10.15 Salary Continuation Agreement for John A. m
Kraeutler
11 Statement re Computation of Per Share Filed herewith
Earnings
13 1997 Annual Report to Shareholders Filed herewith (1)
21 Subsidiaries of the Registrant Filed herewith
23 Consent of Independent Public Filed herewith
Accountants
27 Financial Data Schedule Filed herewith
99 Forward Looking Statements Statement Filed herewith
</TABLE>
- -------------
(1) Only portions of the 1997 Annual Report to Shareholders specifically
incorporated by reference in this Form 10-K are filed herewith. A supplemental
paper copy of the 1997 Annual Report to Shareholders has been provided to the
Securities and Exchange Commission for informational purposes only.
20
<PAGE> 21
Incorporated by reference to:
a. Registration Statement No. 333-02613 on Form S-3 filed with the
Securities and Exchange Commission on April 18, 1996.
b. Registration Statement No. 33-6052 filed under the Securities Act of
1933.
c. Registration Statement No. 333-11077 on Form S-3 filed with the
Securities and Exchange Commission on August 29, 1996.
d. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1992.
e. The Company's Form 8-K filed with the Securities and Exchange
Commission on June 17, 1993.
f. The Company's Forms 8-K filed with the Securities and Exchange
Commission on February 8, 1994 and April 6, 1994.
g. The Company's Form 8-K filed with the Securities and Exchange
Commission on July 2, 1996.
h. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1994 and to Registration Statement No. 33-65443 on
Form S-8 filed with the Securities and Exchange Commission on
December 28, 1995.
i. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1994.
j. Registration Statement No. 33-89214 on Form S-8 filed with the
Securities and Exchange Commission on April 5, 1995.
k. Registration Statement No. 33-38488 on Form S-8 filed with the
Securities and Exchange Commission on December 28, 1990.
l. Registration Statement No. 33-78868 on Form S-8 filed with the
Securities and Exchange Commission on May 12, 1994.
m. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1995.
n. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1996.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the
fiscal year.
21
<PAGE> 22
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MERIDIAN DIAGNOSTICS, INC.
By: /s/ WILLIAM J. MOTTO
------------------------------------
Date: December 29, 1997 William J. Motto
Chairman of the Board
of Directors and Chief Executive
Officer (Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ WILLIAM J. MOTTO Chairman of the Board of December 29, 1997
- ---------------------------------- Directors and Chief Executive
William J. Motto Officer (Principal Executive
Officer)
/s/ J0HN A. KRAEUTLER President and Chief Operating December 29, 1997
- ---------------------------------- Officer, Director
John A. Kraeutler
/s/ GERARD BLAIN Vice President, Secretary and December 29, 1997
- ---------------------------------- Chief Financial Officer
Gerard Blain (Principal Financial Officer and
Principal Accounting Officer)
/s/ JAMES A. BUZARD Director December 29, 1997
- ----------------------------------
James A. Buzard
/s/ GARY P. KREIDER Director December 29, 1997
- ----------------------------------
Gary P. Kreider
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C> <C>
- ----------------------------------
Robert J. Ready Director December 29, 1997
Director December 29, 1997
- ----------------------------------
Jerry L. Ruyan
</TABLE>
23
<PAGE> 24
Report of Independent Public Accountants
----------------------------------------
To Meridian Diagnostics, Inc:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in Meridian
Diagnostics, Inc. and subsidiaries' annual report to shareholders incorporated
by reference in this Form 10-K, and have issued our report thereon dated
November 7, 1997. Our audit was made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed in the accompanying index
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
November 7, 1997
24
<PAGE> 25
SCHEDULE II
Meridian Diagnostics, Inc.
and Subsidiaries
Valuation and Qualifying Accounts
Years Ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Balance
Balance at Charged to Charged at End
Beginning Costs and to Other of
Description of Period Expenses Accounts Deductions Period
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended September 30, 1997:
- ------------------------------
Allowance for Doubtful Accounts $ 128,013 $ 68,489 $ 2,135 $ (31,895) $ 166,742
Year Ended September 30, 1996:
- ------------------------------
Allowance for Doubtful Accounts $ 164,136 $ (19,506) $ 6,419 $ (23,036) $ 128,013
Year Ended September 30, 1995:
- ------------------------------
Allowance for Doubtful Accounts $ 113,183 $ 122,526 $ 4,677 $ (76,250) $ 164,136
</TABLE>
25
<PAGE> 1
Exhibit 11
Meridian Diagnostics, Inc.
and Subsidiaries
Computation of Earnings Per Common Share
For the Periods Ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Weighted Avg. Number of Earnings Per
Common Shares Outstanding Net Income Common Share Use
------------------------- ---------- ------------ ---
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1997:
Shares Outstanding October 1, 1996 14,278,578 $ -- $ --
Weighted average shares issued during fiscal
1997 (86,711 shares) 63,207 -- --
Net Income -- 5,982,085 --
---------- ---------- --------
Primary Earnings Per Common Share 14,341,785 $5,982,085 $ 0.4171 $0.42
=====
Effect of outstanding stock options which is
less than 3% and not required to be disclosed in
financial statements (645,441 shares) 319,427 -- --
---------- ---------- --------
14,661,212 $5,982,085 $ 0.4080
Additional effect of stock options at year-
end stock price 60,289 -- --
---------- ---------- --------
Fully Diluted Earnings Per Common Share 14,721,501 $5,982,085 $ 0.4064
========== ========== ==========
YEAR ENDED SEPTEMBER 30, 1996:
Shares Outstanding October 1, 1995 12,924,814 $ -- $ --
Weighted average shares issued during
the period (1,353,764 shares) 1,247,169 -- --
Net Income -- 5,292,175 --
---------- ---------- --------
14,171,983 $5,292,175 $ 0.3734
Effect of outstanding stock options
(777,586 shares) 495,105 -- --
---------- ---------- --------
Primary Earnings Per Common Share 14,667,088 $5,292,175 $ 0.3608 $0.36
=====
Effect of 1993 convertible debentures 90,566 26,824 --
---------- ---------- --------
14,757,654 $5,318,999 $ 0.3604
Additional effect of stock options at
year-end stock price 2,619 -- --
---------- ---------- --------
Fully Diluted Earnings Per Common Share 14,760,273 $5,318,999 $ 0.3604
========== ========== =========
YEAR ENDED SEPTEMBER 30, 1995:
Shares Outstanding October 1, 1994 12,292,935 $ -- $ --
Weighted average shares issued during the
period (638,237 shares) 66,237 -- --
Weighted average shares redeemed for cash
as a result of stock dividend (398 shares) (320) -- --
Treasury shares repurchased (6,291 shares) (4,100) -- --
Net Income -- 3,524,111 --
---------- ---------- --------
Primary Earnings Per Common Share 12,354,752 $3,524,111 $ 0.2852 $0.29
=====
Effect of outstanding stock options which is
less than 3% and not required to be disclosed
in financial statements (663,553 shares) 318,872 -- --
---------- ---------- --------
12,673,624 $3,524,111 $ 0.2781
Effect of convertible debentures 1,832,891 489,760 --
---------- ---------- --------
14,506,515 $4,013,871 $ 0.2767
Additional effect of stock options at year-end
stock price 35,088 -- --
---------- ---------- --------
Fully Diluted Earnings Per Common Share 14,541,603 $4,013,871 $ 0.2760 $0.28
========== ========== ======== =====
</TABLE>
<PAGE> 1
Exhibit 13
Meridian Diagnostics, Inc.'s
1997 Annual Report
QUARTERLY FINANCIAL DATA
- --------------------------------------------------------------------------------
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited (Amounts in thousands, except for per share data)
- -------------------------------------------------------------------------------------------------------------------
For the Quarter Ended in Fiscal 1997 December 31 March 31 June 30 September 30
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $7,562 $8,337 $9,082 $10,248
Gross profit 4,851 5,465 6,048 6,567
Net earnings 843 1,132 1,697 2,310
Primary earnings per common share(1) .06 .08 .12 .16
Cash dividends per common share(1,2) .06 .04 .04 .04
- -------------------------------------------------------------------------------------------------------------------
For the Quarter Ended in Fiscal 1996 December 31 March 31 June 30 September 30
- -------------------------------------------------------------------------------------------------------------------
Net sales $5,522 $7,255 $7,559 $ 9,055
Gross profit 3,774 5,003 5,362 6,285
Net earnings 629 1,355 1,499 1,809
Primary earnings per common share(1) .05 .10 .11 .12
Cash dividends per common share(1,2) .05 .04 .04 .04
<FN>
(1) The sum of the primary earnings per common share and the cash dividends per
share may not equal the annual earnings and cash dividends per share due to
interim quarter rounding.
(2) Includes special 1995 and 1996 year-end cash dividend of $0.025 per share
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Fiscal 1997 Compared to Fiscal 1996
Net sales increased $5,838,000 or 20%, to $35,229,000 in fiscal 1997. This
growth stems primarily from strong unit volume increases in the Premier and
ImmunoCard(R) lines, the full year effect of the acquisition of the enteric
product line from Cambridge Biotech Corporation on June 24, 1996 and significant
growth in international sales, primarily in the Pacific Rim. The Premier line
was up $4,057,000, or 45%, from fiscal 1996 primarily related to products for
detection of EHEC and E. coli, up $1,547,000 and products for H. pylori, up
$589,000 with the Cambridge acquisition, up $1,948,000, accounting for the
balance of this growth.
In the ImmunoCard line which increased $1,737,000, or
56%, the growth was attributable to products used for the detection of C.
difficile Toxin A, up $1,126,000, H. pylori, up $294,000, Mycoplasma, up
$211,000 and Rotavirus, up $138,000.
OEM sales increased $461,000, or 45%, to $1,491,000 from sales of EHEC/E.
coli to Novapath for Japan. There were no sales in fiscal 1997 of strep latex to
Becton, Dickinson and Company or FiltraCheck-UTI(R) to Biostar resulting in a
decline of $130,000 versus fiscal 1996. All other OEM products increased
$118,000, essentially offsetting the strep and FiltraCheck declines.
Inova product sales in Italy were up $146,000, or 30%. The mononucleosis line
continued to decline, down $409,000, or 18%, as a result of the transition from
MonoSpot(R) to the Company-produced latex products. The other significant
decline was in the fungal line, down $191,000, or 8%.
The increase in sales was more than accounted for by unit volume growth, up
26%, offset in part by lower pricing, down 5%, and currency, down 1%.
Contributing to the volume growth is the impact of the national contracts
established during fiscal 1996 and 1997 in the U.S. with large hospital chains
and reference laboratories in addition to the specific product growth mentioned
above, i.e., the Cambridge acquisition, EHEC/E. coli in the U.S. and in Japan,
etc.
The lower pricing is directly related to the national contracts. However, the
lower prices were more than offset by the incremental volume from these
exclusive arrangements. Healthcare cost-containment in the international markets
was also a factor in the lower pricing and represented approximately 14% of the
total pricing variances versus fiscal 1996.
Nearly two-thirds of the annual currency impact occurred in the fourth fiscal
quarter as the dollar strengthened significantly versus the lira.
In total, international sales grew $2,498,000, or 32%, from $7,783,000 in
fiscal 1996 to $10,281,000 in 1997 and increased from 26% of total sales to 29%.
Over 85% of the growth of $2,498,000 is attributable to the Pacific Rim with the
remainder of the increase largely in Canada. European operations were relatively
flat, due largely to the unfavorable currency and pricing which amounted to
approximately $565,000 in total. Foreign sales may be adversely affected by the
recent strengthening of the dollar. The Company cannot assure that sales of
certain products made under endemic conditions in specific geographic areas
during fiscal 1997, the Pacific Rim for example, will continue in fiscal 1998.
Gross profit increased $2,507,000 or 12% to $22,931,000 for fiscal 1997 from
$20,424,000 in fiscal 1996. As a percentage of sales, gross profit decreased to
65.1% in fiscal 1997 from 69.5% in fiscal 1996. This reduction in the gross
profit rate is primarily attributable to the higher cost of the enteric products
acquired from Cambridge in June 1996. Under a one-year inventory purchase
agreement, the Company purchased products at a cost higher than the Company's
cost of manufacturing the acquired products in the Company's manufacturing
facilities in Cincinnati.
As of September 30, 1997, these products have been assimilated into the
Company's manufacturing facilities, however, the previously anticipated
improvement in the gross profit rate for the fourth fiscal quarter was not
realized due to the earlier reported delay in the German registration of the
former Cambridge products under the Meridian label. This delay resulted in an
extension of the sell-out period of the acquired inventory, which is now
expected to be largely completed during the first quarter of fiscal 1998. When
this purchased inventory is depleted, the gross profit percentage is expected to
improve.
Total operating expenses increased $1,111,000 or 9% for fiscal 1997 compared
to the prior year, but declined as a percentage of sales to 37.0% versus 40.5%,
or a reduction of 3.5 percentage points. Research and development expenses were
relatively constant at $1,502,000 year-to-year. However, these expenses are
anticipated to increase significantly in fiscal 1998 as a result of the
multi-site clinical studies under way for H. pylori Specific Antigen (HpSA).
This organism is the major cause of gastric and duodenal ulcers and has been
implicated as a cause of gastric cancer. Selling and marketing expenses
increased $1,233,000 or 21% for the twelve months ended September 30, 1997. This
increase was attributable to the full year costs of U.S. sales personnel added
during fiscal 1996 to provide improved geographic coverage and penetration of
national accounts, amortization of certain Cambridge acquisition costs, higher
national sales meeting expenses and facility-related expenses for the new and
refurbished buildings. Offsetting these increases were lower recruiting and
relocation expenses. European selling and marketing expenses, included above,
increased about 9% or $86,000 primarily in higher personnel and meeting
expenses. General and administrative expenses decreased $124,000 or 3% compared
to the prior year. The impact of the stronger dollar versus the lira coupled
with across-the-board expense reductions in Europe, revisions to the
amortization of certain intangible costs related to prior product line
acquisitions and the one-time fiscal 1996 state filing fee to increase the
number of authorized shares of common stock offset increases in U.S. personnel
costs, provision for bad debts and outside professional fees for cost savings
special projects.
Operating income, as a result of the above, increased $1,396,000 or 16% for
the 1997 fiscal year versus 1996. As a percent of sales, operating income
declined marginally to 28.1% for 1997 versus 29.0% for 1996.
10
<PAGE> 3
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Other expense (net) increased $578,000 for the period ended September 30,
1997. Interest expense (net) increased $149,000 from the expense associated with
the 7% Convertible Subordinated Debentures due 2006 which were issued in
September 1996. In addition, fiscal 1996 included gains of $150,000 and $100,000
respectively, from payment of a fully reserved note related to a March 1994
Acquisition Agreement and from the sale of the Meritec(a) Campy product. The
balance of the increase in other expense was attributable to lower licensing
fees and currency losses which were not material. The cumulative foreign
currency translation adjustment decreased $276,000 during the twelve month
period as a result of the dollar strengthening against the lira.
The company's effective tax rate decreased 2.1 percentage points from 40.5%
in fiscal 1996 to 38.4% in fiscal 1997. This reduction stemmed from a higher
proportion of income being generated in the U.S. compared to the Company's
Italian subsidiary which is taxed at a significantly higher rate plus the higher
foreign sales which increased the foreign sales corporation benefit.
Net earnings increased $690,000 or 13% to $5,982,000 for the twelve months
ended September 30, 1997 compared to $5,292,000 in the prior year, and declined
one percentage point to 17% of sales in fiscal 1997 versus 18% in 1996.
Primary earnings per share were $.42 in fiscal 1997 compared to $.36 in 1996,
an increase of 17%. The higher growth rate in earnings per share compared to net
earnings results from a decrease in the weighted average primary shares
outstanding which is directly related to the effect of outstanding stock options
which were greater than 3% in fiscal 1996 and therefore included in the share
count.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased $4,281,000 or 17%, to $29,391,000 in fiscal 1996. This
increase was primarily from strong unit volume growth in the Premier,
Para-Pak(R) and ImmunoCard lines coupled with the acquisition of the enteric
product line from Cambridge Biotech Corporation. In the Premier and ImmunoCard
formats, the growth continued to be attributable to those products used for
identification of Toxin A, H. pylori, EHEC, Mycoplasma and Rotavirus. In
Para-Pak, the growth was attributable to the core parasitology transport format,
Para-Pak Ultra and Para-Pak Plus. In addition, the Inova line of products,
licensed for Italy in fiscal year 1995, added over $472,000 of sales volume for
the year. The products acquired from Cambridge at the end of the third quarter
contributed $1,096,000 of sales in fiscal 1996.
OEM sales, consisting of products sold primarily to Johnson & Johnson,
Carter-Wallace, Inc. and Becton, Dickinson and Company, were down for the twelve
months ended September 30, 1996 by $190,000, largely a result of the timing of
orders of Epstein-Barr Virus products from Johnson & Johnson and declining sales
of strep latex to Becton, Dickinson and Company. This decline was partially
offset by increased sales of mononucleosis latex and FiltraCheck-UTI(R) to
Carter Wallace, Inc. and to Biostar, respectively.
Other decreases for fiscal 1996 included the mononucleosis line, down about
8% due to the wind-down of production of the MonoSpot(R) product previously
supplied by ODSI, and the transition to the Company-produced, new mononucleosis
latex products; decreased chlamydia sales; and the impact of a one-time sale of
bulk giardia and cryptosporidium in Germany in fiscal 1995.
The increase in sales of 17% for fiscal 1996 versus fiscal 1995 broken down
by volume, price and currency was 15.3%, 0.6% and 1.1% respectively.
European sales increased from $5,101,000 to $6,456,000, or 27%, for the
twelve month period principally from volume growth in the Premier line, the
Inova line licensed for Italy in fiscal 1995, ImmunoCard and Para-Pak formats.
Currency contributed $263,000, or about 5% of the growth, as a result of the
stronger lira versus the dollar.
Gross profit increased $3,323,000, or 19%, to $20,424,000 for fiscal 1996
from $17,101,000 in fiscal 1995. As a percentage of sales, gross profit
increased to 69.5% in fiscal 1996 from 68.1% in fiscal 1995. This improvement
was the result of a favorable product mix, driven largely by growth in excess of
35% in the ImmunoCard line, the decrease in lower margin OEM sales, favorable
year-end inventory variances, the impact of the 15% increase in volume and
significant reductions in scrap and depreciation expenses. This improvement was
particularly noteworthy considering the higher costs associated with the enteric
product line acquisition from Cambridge. In addition to the amortization of
certain acquisition costs, the acquisition included a one-year inventory
purchase agreement at a negotiated cost higher than the Company's cost of
manufacturing following integration of the purchased product line into the
Company's manufacturing facilities in Cincinnati during the third and fourth
quarters of fiscal 1997. The gross profit percentage for fiscal 1997 versus
fiscal 1996 declined modestly because of these higher Cambridge-related costs.
Total operating expenses increased $1,384,000 or 13% for the twelve months
ended September 30, 1996, compared to the prior year. Total operating expenses
were 40.5% of net sales for fiscal 1996, down 1.4 percentage points from the
prior year. Research and development expenses increased $67,000 or 5% for the
twelve month period. Higher personnel costs associated with initial development
work on the Premier EHEC in food and agricultural applications plus development
of the H. pylori antigen in stool were offset in part by lower clinical trial
and contract research expenses. Selling and marketing expenses increased
$762,000 or 15% for the twelve months. Increases were attributable to personnel
costs in the U.S. associated with the addition of a third sales region,
amortization of certain Cambridge acquisition costs and higher depreciation
expense associated with the new U.S. headquarters and refurbished facilities in
Cincinnati. In Europe, expenses were up primarily from the impact of the
stronger lira versus the dollar. General and administrative expenses increased
$556,000 or 14% for the twelve month period. Personnel costs in the U.S. and in
Europe, outside services associated with expanded computer information systems,
facility expenses related to the new administrative headquarters, the impact of
exchange rates from the stronger lira, higher international travel and the
one-time state filing fee for the
11
<PAGE> 4
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
increase in the number of authorized shares of common stock are the primary
reasons for the increase.
Operating income, as a result of the above, increased $1,938,000 or 29%
compared to the sales increase of 17% for the 1996 twelve month period versus
1995. As a percent of sales, operating income improved almost three percentage
points to 29.0% for fiscal 1996 versus 26.2% for fiscal 1995.
Other income (net) increased $995,000 for the period ended September 30,
1996. Interest expense (net) declined $689,000 for the twelve month period
primarily due to the reduction in interest expense as a result of the November
30, 1995 conversion of the 7-1/4% Convertible Subordinated Debentures issued by
the Company in 1993. Interest expense will increase in fiscal 1997 from the
issuance of $20 million of 7% Convertible Subordinated Debentures on September
27, 1996. Also included in the twelve month period was a gain of $150,000 from
payment of a fully reserved note related to a March 1994 Agreement, wherein the
Company sold to VAI Diagnostics, Inc. tissue culture products acquired in
January 1994 from an affiliate of ODSI, and a gain of $100,000 from the sale of
the Meritec(a) Campy product to Integrated Diagnostics, Inc. Gains/losses in
foreign exchange for the twelve month period were not material. The cumulative
foreign currency translation adjustment increased by $98,000 during the twelve
month period as a result of the lira strengthening against the U.S. dollar.
The Company's effective tax rate decreased for the year to 40.5% in fiscal
1996 compared to 40.9% in fiscal 1995.
Net earnings increased $1,768,000, or 50% to $5,292,000 for the twelve months
ended September 30, 1996 compared to $3,524,000 in fiscal 1995, and improved 4
percentage points to 18.0% of sales in fiscal 1996 versus 14.0% in fiscal 1995.
The corresponding increase in primary earnings per share from $.29 in fiscal
1995 to $.36 in fiscal 1996 is approximately 24%. The lower growth rate in
earnings per share resulted from the increase in outstanding shares in fiscal
1996 associated with the first quarter conversion of the 7-1/4% convertible
subordinated debentures issued by the Company in 1993 plus the effect of
outstanding stock options which is greater than 3%.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had cash and cash equivalents of
$10,523,000, investments of $11,213,000 and working capital of $33,570,000.
Trade accounts receivable increased $1,416,000, or 15%, primarily as a result of
the increase in the month of September sales of $1,519,000. Inventories
increased $400,000 or 9%.
Net cash flow provided by operating activities was $6,453,000 for the twelve
month period ended September 30, 1997, up $1,663,000, or 35%, from the prior
year period. This increase resulted primarily from the increase in net earnings,
depreciation and amortization. Net changes in working capital were relatively
constant for fiscal 1997 and fiscal 1996.
Net cash provided from investing activities was $1,257,000. Capital
expenditures for the twelve months ended September 30, 1997 were $1,579,000.
Sale of investments provided $2,881,000. The Company's anticipated total capital
expenditures for fiscal 1998 are $2,200,000. The major capital expenditures
include upgrade of the Company's computer, automated filling equipment for the
ParaPak line and property expansion. Net cash used for financing activities was
$2,802,000, primarily from dividend payments.
On November 19, 1997, the Board of Directors declared the regular cash
dividend of $0.0425 per share and a special year-end cash dividend of $0.025 per
share payable December 8, 1997 to shareholders of record on November 28, 1997.
The Board of Directors also announced its intention to increase the regular
annual dividend rate for fiscal 1997 of $0.17 to $0.20 per share for fiscal
1998, representing over a 18% increase in the annual cash dividend rate. Total
dividends paid during fiscal 1997, including a special fiscal 1996 year-end
dividend paid on December 6, 1996 of $357,000, were $2,688,000 compared to
$2,230,000 paid in fiscal 1996.
On September 27, 1996, the Company issued $20 million of 7% convertible
subordinated debentures which are due in 2006. Of the $18,755,000 in net
proceeds, approximately $14,094,000 was invested in short-term investments.
On June 24, 1996, the Company acquired the enteric product line of Cambridge
Biotech Corporation for approximately $6,566,000. 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 $5,336,000. These
intangibles included a covenant-not-to-compete, a patent, a customer list, a
supply agreement, manufacturing procedures and cost in excess of net assets
acquired (goodwill). Aside from goodwill, these intangibles were valued based on
the Company's internally developed analysis of cash flow, sales and cost
projections related to the particular intangible assets. This acquisition was
funded through liquidation of a portion of the Company's short-term investments.
On October 10, 1995, the Company called for redemption of the then
outstanding $7.4 million of its 7-1/4% Convertible Subordinated Debentures due
in 2001. Of the originally issued $11,500,000 principal amount, $113,000 was
redeemed for cash on November 30, 1995. The balance was converted into Common
Stock at $5.97 per share.
On April 16, 1996, the Company paid off the outstanding balance of its
mortgage loans, reducing 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
$12,500,000 line of credit with a commercial bank and cash and cash equivalents
and investments of approximately $21,736,000.
12
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of September 30, 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents (Note 2) $10,523,191 $ 5,648,225
Investments (Notes 1 and 2) 11,213,144 14,094,299
Accounts receivable, less allowance of $166,742 in 1997 and $128,013
in 1996 for doubtful accounts 10,622,759 9,206,498
Inventories (Notes 1 and 3) 4,651,687 4,251,531
Prepaid expenses and other 447,881 189,433
Deferred tax assets 382,518 402,125
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 37,841,180 33,792,111
- --------------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment (Note 1):
Land 259,993 277,691
Buildings and improvements 6,629,847 5,864,008
Machinery, equipment and furniture 7,822,671 6,322,071
Construction in progress 96,218 1,061,002
- --------------------------------------------------------------------------------------------------------------------------------
14,808,729 13,524,772
Less--accumulated depreciation and amortization 6,359,499 5,171,388
- --------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 8,449,230 8,353,384
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets (Notes 1 and 4):
Long-term receivable and other 298,301 573,710
Deferred royalties 195,355 278,027
Deferred tax assets 645,542 109,503
Deferred debenture offering costs, net of accumulated amortization
of $136,500 in 1997 and $1,500 in 1996 1,191,836 1,260,543
Covenants not to compete, and consulting agreements, net of accumulated
amortization of $3,123,408 in 1997 and $2,381,064 in 1996 2,397,186 3,139,530
License agreements, net of accumulated amortization of $887,541 in 1997 and $829,987 in 1996 247,571 305,125
Patents, tradenames and distributorships, net of accumulated amortization
of $1,204,686 in 1997 and $707,474 in 1996 2,965,615 3,417,517
Other intangible assets, net of accumulated amortization of $303,869 in 1997
and $154,469 in 1996 1,937,131 2,086,531
Cost in excess of net assets acquired, net of accumulated amortization
of $422,880 in 1997 and $310,218 in 1996 1,321,943 1,434,605
- --------------------------------------------------------------------------------------------------------------------------------
Total other assets 11,200,480 12,605,091
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $57,490,890 $54,750,586
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term obligations (Note 5) $ 73,877 $--
Current portion of capital lease obligations (Note 5) 106,516 139,019
Accounts payable 839,093 990,249
Accrued payroll and payroll taxes 841,603 850,722
Other accrued expenses 1,244,078 1,648,175
Income taxes payable 1,165,636 831,723
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,270,803 4,459,888
- --------------------------------------------------------------------------------------------------------------------------------
Long-Term Obligations (Note 5) 20,023,880 20,105,081
- --------------------------------------------------------------------------------------------------------------------------------
Capital Lease Obligations (Note 5) 557,313 617,619
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Note 7):
Preferred stock, no par value, 1,000,000 shares authorized; none issued -- --
Common stock, no par value, 50,000,000 shares authorized; 14,365,289
and 14,278,578 shares issued and outstanding, respectively, stated at 2,393,852 2,386,153
Additional paid-in capital 20,571,453 20,526,337
Retained earnings 10,103,837 6,809,830
Cumulative foreign currency translation adjustment (430,248) (154,322)
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 32,638,894 29,567,998
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $57,490,890 $54,750,586
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
13
<PAGE> 6
CONSOLIDATED STATEMENTS OF EARNINGS
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $35,228,872 $29,390,861 $25,109,711
Cost of Sales 12,297,850 8,966,965 8,008,529
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 22,931,022 20,423,896 17,101,182
- --------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Research and development 1,501,835 1,499,334 1,432,315
Selling and marketing 7,223,007 5,990,390 5,228,717
General and administrative 4,295,854 4,420,067 3,864,294
- --------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 13,020,696 11,909,791 10,525,326
- --------------------------------------------------------------------------------------------------------------------------------
Operating income 9,910,326 8,514,105 6,575,856
Other Income (Expense):
Licensing and related fees 14,131 44,638 102,698
Interest income 1,037,000 379,582 435,686
Interest expense (1,195,773) (389,721) (1,134,844)
Other, net (54,239) 344,580 (19,470)
- --------------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (198,881) 379,079 (615,930)
- --------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 9,711,445 8,893,184 5,959,926
Income Taxes (Note 6) 3,729,360 3,601,009 2,435,815
- --------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 5,982,085 $ 5,292,175 $ 3,524,111
- --------------------------------------------------------------------------------------------------------------------------------
Primary Weighted Average Number of Common Shares Outstanding 14,341,785 14,667,088 12,354,752
- --------------------------------------------------------------------------------------------------------------------------------
Primary Earnings Per Common Share $.42 $.36 $.29
- --------------------------------------------------------------------------------------------------------------------------------
Fully Diluted Weighted Average Number of Common Shares Outstanding NA NA 14,541,603
- --------------------------------------------------------------------------------------------------------------------------------
Fully Diluted Earnings Per Common Share NA NA $.28
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
14
<PAGE> 7
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<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, 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, net 42,849 14,961 34,131 -- -- 49,092
3 for 2 stock split 4,097,645 -- -- -- -- --
Debenture conversions 589,600 292,908 3,040,807 -- -- 3,333,715
Foreign currency translation
adjustment -- -- -- -- (32,399) (32,399)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 12,924,814 1,487,159 13,895,901 3,747,930 (252,758) 18,878,232
Net earnings -- -- -- 5,292,175 -- 5,292,175
Cash dividends paid--
$.16 per share -- -- -- (2,230,275) -- (2,230,275)
Exercise of stock options, net 36,052 15,767 104,160 -- -- 119,927
Debenture conversions 1,317,712 883,227 6,526,276 -- -- 7,409,503
Foreign currency translation
adjustment -- -- -- -- 98,436 98,436
- --------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 14,278,578 2,386,153 20,526,337 6,809,830 (154,322) 29,567,998
Net earnings -- -- -- 5,982,085 -- 5,982,085
Cash dividends paid--
$.19 per share -- -- -- (2,688,078) -- (2,688,078)
Exercise of stock options, net 86,711 7,699 45,116 -- -- 52,815
Foreign currency translation
adjustment -- -- -- -- (275,926) (275,926)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 14,365,289 $2,393,852 $20,571,453 $10,103,837 $(430,248) $32,638,894
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
15
<PAGE> 8
Consolidated Statements of Cash Flows
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net earnings $ 5,982,085 $ 5,292,175 $ 3,524,111
Non-cash items--
Depreciation and amortization of property, plant and equipment 1,239,926 1,031,915 863,436
Amortization of intangible assets and deferred royalties 1,776,851 975,466 978,383
Deferred income taxes (516,432) (98,838) (70,019)
Changes in current assets excluding cash/cash equivalents and investments (2,074,864) (3,136,255) (1,611,612)
Changes in current liabilities excluding current portion
of long-term obligations (230,460) 1,125,939 (884,578)
Long-term receivable and payable 275,409 (400,432) (2,470)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,452,515 4,789,970 2,797,251
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Property, plant, and equipment acquired, net (1,578,698) (1,245,144) (2,472,177)
Sale (purchase) of short-term investments 2,881,155 (14,094,299) --
Product line acquisition--
Inventory and equipment -- (1,030,000) --
Advance royalties paid -- (200,000) --
Covenants not to compete -- (1,260,000) --
Patents, tradenames, customer lists and other -- (3,416,000) --
Cost in excess of net assets acquired -- (660,000) --
Patents (45,317) -- --
Advance royalties paid -- (37,500) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 1,257,140 (21,942,943) (2,472,177)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of subordinated debentures, net of offering costs (66,293) 18,754,497 --
Proceeds from other long-term obligations 60,296 56,039 1,284,005
Repayment of long-term obligations (160,429) (2,794,939) (329,391)
Dividends paid (2,688,078) (2,230,275) (1,224,917)
Proceeds from issuance of common stock 52,815 53,133 45,750
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (2,801,689) 13,838,455 (224,553)
- ----------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (33,001) 44,106 (13,867)
Net Increase (Decrease) in Cash and Cash Equivalents 4,874,966 (3,270,412) 86,654
Cash and Cash Equivalents at Beginning of Period 5,648,225 8,918,637 8,831,983
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 10,523,191 $ 5,648,225 $ 8,918,637
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for--
Income taxes $ 3,035,188 $ 3,109,538 $ 2,882,336
Interest 1,458,519 148,715 883,356
Capitalized lease obligations 51,001 650,940 259,240
Conversion of 7 1/4% debentures (due 2001) to common stock,
net of amortization of deferred debenture offering costs of
$457,000 and $186,000, respectively -- 7,409,503 3,333,715
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
16
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(a) Principles of Consolidation--The consolidated financial statements include
the accounts of Meridian Diagnostics, Inc. and its subsidiaries, Meridian
Diagnostics Corporation, 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 Financial
Accounting Standards (FASB) No.115, "Accounting for Certain Investments in Debt
and Equity Securities" (Statement 115), in 1995. There was no cumulative effect
as a result of adopting Statement 115 in 1995.
Debt securities for which the Company does not have the intent or ability
to hold to maturity are classified as available for sale, along with any equity
securities. The estimated fair value of investments approximates cost, and
therefore, there are no unrealized gains or losses reported as of September 30,
1997 or 1996.
(c) Inventories--Inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or market.
(d) Property, Plant and Equipment--Property, plant and equipment are stated at
cost. Upon retirement or other disposition of property, plant and equipment, the
cost and related accumulated depreciation and amortization are removed from the
accounts and the resulting gain or loss is reflected in earnings. Maintenance
and repairs are expensed as incurred. Depreciation and amortization are computed
on the straight-line method in amounts sufficient to write-off the cost over the
estimated useful lives as follows:
Buildings and improvements--5 to 33 years
Machinery, equipment and furniture--3 to 10 years
(e) Intangible Assets--Intangible assets are stated at cost less accumulated
amortization and are being amortized on a straight-line basis over their
estimated useful lives:
Covenants not to compete--5 to 10 years
License agreements--3 to 13 years
Patents, tradenames and distributorships--1 to 15 years Cost in excess
of net assets acquired and other intangible assets--15 years
Deferred debenture offering costs--10 years
The Company continually evaluates whether subsequent events and
circumstances have occurred that indicate the remaining estimated useful lives
of intangible assets may warrant revision or that the remaining balances of
these assets may not be recoverable. When factors indicate that an intangible
asset should be evaluated for possible impairment, the Company uses an estimate
of the related product line's cash flows over the remaining life of the asset in
measuring whether the asset is recoverable. For the three years ended September
30, 1997, there were no adjustments to the carrying value of intangible assets
resulting from these evaluations.
(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.
(g) Earnings Per Common Share--Primary earnings per common share are based on
the weighted average number of common shares outstanding during the year plus
any dilutive common stock equivalents. Outstanding stock options, which are the
only common stock equivalent, resulted in per share dilution of approximately
$.01 for fiscal 1996. Fully diluted earnings per share were dilutive for fiscal
1995 only and included the impact of assuming the convertible subordinated
debentures were converted, net of the impact of pro forma, after tax interest
expense.
On September 12, 1995, the Company's Board of Directors declared a
three-for-two stock split to shareholders of record on September 22, 1995. On
November 16, 1994, the Company's Board of Directors declared a 3% stock
dividend. 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.
In February 1997, the FASB issued Statement No. 128 "Earnings Per Share"
(Statement 128). This statement requires the presentation of basic earnings per
share (EPS) and diluted EPS beginning in the first quarter of fiscal 1998. Basic
EPS is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding. Diluted EPS is computed by
adding to the weighted average number of common shares outstanding the dilutive
effect of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. Using the methods prescribed in
Statement 128, pro forma basic and diluted earnings per share would be as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Pro Forma EPS Data
1997 1996 1995
Basic Diluted Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended
September 30, $.42 $.41 $.37 $.36 $.29 $.28
Quarter ended
September 30, .16 .16 .12 .12 .09 .09
June 30, .12 .12 .11 .10 .08 .08
March 31, .08 .08 .10 .09 .08 .08
December 31, .06 .06 .05 .04 .04 .03
</TABLE>
(h) Research and Development Costs--Research and development costs are charged
to earnings as incurred.
17
<PAGE> 10
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(i) Revenue Recognition--Revenue is recognized from sales when a product is
shipped. Income from licensing agreements is recognized as earned and as
stipulated by the respective agreements.
(j) Advertising--Advertising costs are charged to earnings as incurred.
Expenditures for advertising in 1997, 1996 and 1995 were approximately $34,000,
$28,000 and $31,000, respectively.
(k) Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(l) Translation of Foreign Currency--Assets and liabilities of foreign
operations are translated using year-end exchange rates and revenues and
expenses are translated using exchange rates prevailing during the year, with
gains or losses resulting from translation included in a separate component of
shareholders' equity. Gains and losses resulting from transactions in foreign
currencies were immaterial.
(m) Segment Data and Major Customers--The Company was formed in June 1976 and
functions as a research, development, manufacturing, marketing and sales
organization with primary emphasis in the field of diagnostic tests for
infectious diseases. The Company grants credit under normal terms to its
customers, primarily to hospitals, commercial laboratories and distributors in
the United States and the rest of the world.
A summary of the Company's international operations is as follows. No
foreign country had sales in excess of 10% of consolidated sales.
<TABLE>
<CAPTION>
Meridian Diagnostics Europe
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $5,766 $6,456 $5,102
Operating profit 999 1,572 1,021
Identifiable assets 5,123 5,164 4,583
Accounts receivable 2,906 3,166 2,538
</TABLE>
Accounts receivable which are dependent upon funds from the Italian
government represent approximately 20% of the accounts receivable balance at
September 30, 1997.
<TABLE>
<CAPTION>
Export Sales - U.S. Operations
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $4,515 $1,327 $709
Accounts receivable 1,365 541 149
</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,
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Customer A $6,533 (19%) $7,534 (26%) $6,033 (24%)
Customer B 4,991 (14%) 3,436 (12%) 2,569 (10%)
</TABLE>
(n) Reclassifications--Certain reclassifications have been made to the 1996
financial statements to conform with the current year presentation.
(2) CASH AND CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents (with original maturities of less than 3 months)
and investments are comprised of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents Investments
September 30, 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and money market funds $ 2,431,360 $4,164,944 $ -- $ --
Commercial paper 8,091,831 989,207 -- 8,610,732
Corporate and municipal put bonds -- 494,074 -- 5,480,359
U.S. Treasuries -- -- 8,753,900 --
Mortgage-backed securities -- -- 2,456,036 --
Common stock -- -- 3,208 3,208
- ---------------------------------------------------------------------------------------------------------------------------------
$10,523,191 $5,648,225 $11,213,144 $14,094,299
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997 and 1996, the market value of the Company's
investments approximated cost. U.S. Treasuries have maturities from May 1998
through August 1999 and have interest rates ranging from 5.75% to 6.38%.
Mortgage-backed securities, which consist of Federal National Mortgage
Association securities, mature in 1998 and have an interest rate of 5.68%.
18
<PAGE> 11
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(3) INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
September 30, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $1,399,188 $1,223,438
Work-in-process 1,652,270 966,437
Finished goods 1,600,229 2,061,656
- ---------------------------------------------------------------------------------------------------------------------------
$4,651,687 $4,251,531
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) Product Line Acquisitions
In June 1996, the Company acquired the enteric product line of Cambridge
Biotech Corporation, comprised of products used to identify Adenovirus,
Rotavirus, C. difficile and Lyme disease. The Company also acquired inventory,
equipment, certain license rights, customer lists, a non-competition agreement,
a supply agreement and technical information for the manufacture of the
products.
The purchase included $6,351,000 in cash paid to Cambridge and $215,000 of
expenses for a total purchase price of $6,566,000. The Company agreed to pay
Cambridge a royalty of 2% on product sales over a five year period beginning
June 24, 1996. Included in the $6,351,000 payment is an advanced payment of
$200,000 on such royalties.
(5) LONG-TERM OBLIGATIONS,
BANK CREDIT ARRANGEMENTS
AND COMMITMENTS
(a) Long-Term Obligations--Long-term obligations are comprised of the following
at:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Convertible Subordinated
Debentures, unsecured,
7% annual interest payable
semi-annually on March 1
and September 1, principal
due September 1, 2006 $20,000,000 $20,000,000
Other 97,757 105,081
- --------------------------------------------------------------------------------
20,097,757 20,105,081
Less current portion 73,877 --
- --------------------------------------------------------------------------------
$20,023,880 $20,105,081
- --------------------------------------------------------------------------------
</TABLE>
The Company issued $20 million of 7% Convertible Subordinated Debentures on
September 27, 1996 which are due in 2006. The Debentures are convertible into
Common Stock at $16.09 per share. Prior to September 1, 1999, the Debentures may
be redeemed if the closing sales price of the Common Stock equals or exceeds
140% of the then current conversion price for at least 20 trading days within 30
consecutive trading days ending not more than five trading days prior to the
date of the notice of redemption. These debentures were issued at par and do not
have a discount feature.
As part of a bank credit arrangement the Company has a $12,500,000 line of
credit which expires on June 19, 1998 and calls for interest at prime floating
or the LIBOR rate plus 2.75%. There were no borrowings outstanding on the line
of credit at September 30, 1997. In connection with the bank credit arrangement,
the Company has agreed, among other things, to meet certain financial ratio
requirements and to limit additional indebtedness.
Maturities on the above long-term obligations are all after 2001.
The fair market value of the Company's debt approximates book value.
(b) Capital Lease Obligations--At September 30, 1997, the Company has equipment
leases with cost and related accumulated depreciation of $964,000 and $438,000,
respectively, under capital leases expiring in various years through 2004.
Amortization of assets under capital leases is included in depreciation expense.
The future minimum annual rentals under the capital leases at September 30,
1997 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
1998 $154,106
1999 154,106
2000 151,811
2001 132,678
2002 119,497
Thereafter 106,901
- --------------------------------------------------------------------------------
Subtotal $819,099
Less: portion of payments representing interest (155,270)
- --------------------------------------------------------------------------------
Present value of lease payments $663,829
Less: current portion 106,516
- --------------------------------------------------------------------------------
$557,313
- --------------------------------------------------------------------------------
</TABLE>
(c)Commitments--The Company has entered into various license agreements,
twenty-three of which are active. These agreements have different terms, include
a variety of renewal options and were acquired either directly by the Company or
via assignment as a result of acquisitions. These license agreements require the
Company to pay a specified percentage of the sales of licensed products (1% to
10%). These royalty expenses are recognized on an as-earned basis and recorded
in the year earned as a component of cost of sales. Annual royalty expenses
associated with these agreements were approximately $1,021,000, $500,000 and
$408,000, respectively, for the years ended September 30, 1997, 1996 and 1995.
19
<PAGE> 12
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(6) INCOME TAXES
The provision for income taxes includes the following components:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended September 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Currently payable $2,911,891 $2,514,903 $1,866,090
Temporary differences--
Tax depreciation greater (less) than book depreciation (60,251) 3,063 (26,842)
State franchise taxes (53,901) (31,461) (14,335)
Currently nondeductible expenses (21,460) (15,818) (13,720)
Intangible asset amortization (94,041) (167,940) (155,693)
Other, net 25,255 208,579 117,224
- ---------------------------------------------------------------------------------------------------------------------------------
2,707,493 2,511,326 1,772,724
State and local 577,339 332,715 240,662
Foreign 444,528 756,968 422,429
- ---------------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $3,729,360 $3,601,009 $2,435,815
- ---------------------------------------------------------------------------------------------------------------------------------
</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>
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
Years Ended September 30, Amount Rate Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed provision for income
taxes at statutory rate $3,301,891 34.0% $3,023,682 34.0% $2,026,375 34.0%
Increase/(decrease) in taxes resulting from:
State and local income taxes,
net of federal income tax effect 385,085 4.0 219,592 2.5 158,837 2.7
Foreign taxes 190,877 2.0 265,793 3.0 154,399 2.6
Tax exempt income 1,015 0.0 (30,165) (0.3) (38,003) (.6)
Foreign Sales Corporation benefit (121,044) (1.3) (75,305) (0.8) (34,250) (.6)
Officers' life insurance 10,375 0.1 29,194 0.3 22,384 .4
Other, net (38,839) (0.4) 168,218 1.8 146,073 2.4
- --------------------------------------------------------------------------------------------------------------------------------
Actual provision for income taxes $3,729,360 38.4% $3,601,009 40.5% $2,435,815 40.9%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of the net deferred tax assets were as follows at:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
State income taxes $ 172,992 $ 113,523
Currently nondeductible expenses 167,778 144,109
Intangible asset amortization 610,794 507,071
Other 221,836 149,962
- --------------------------------------------------------------------------------
Total $1,173,400 $ 914,665
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation -- (39,471)
Other (145,340) (363,566)
- --------------------------------------------------------------------------------
Total $ (145,340) $(403,037)
- --------------------------------------------------------------------------------
Net deferred tax assets $1,028,060 $ 511,628
- --------------------------------------------------------------------------------
</TABLE>
No valuation allowances were recorded against deferred tax assets or
deferred tax liabilities at September 30, 1997 or 1996.
(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 an
employee's contributions. Discretionary and matching contributions by the
Company to the plan amounted to approximately $291,000, $269,000, and $273,000,
during 1997, 1996 and 1995, respectively.
20
<PAGE> 13
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(b) Stock-Based Compensation Plans--The Company has three stock option plans,
the 1986 Stock Option Plan ("The 1986 Plan"), the 1994 Directors' Stock Option
Plan ("The 1994 Plan"), the 1996 Stock Option Plan ("The 1996 Plan"), and an
Employee Stock Purchase Plan ("The ESP Plan") which became effective October 1,
1997. The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123, the Company's net income
and earnings per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
Net Income:
As Reported $5,982,085 $5,292,175
Pro Forma 5,886,085 5,232,175
Primary EPS:
As Reported $.42 $.36
Pro Forma .41 .36
Fully Diluted EPS:
As Reported NA NA
Pro Forma .40 .36
</TABLE>
Because the Statement 123 method of accounting has not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Effective October 1, 1997, the Company may sell shares of stock to its
full-time and part-time employees under the ESP Plan up to the number of shares
equivalent to a 1% to 15% payroll deduction from an employee's base salary plus
an additional 5% dollar match of this deduction by the Company. No shares were
sold under the ESP Plan as of September 30, 1997.
The Company may grant options for up to 1,441,235 shares under the 1986
Plan including the 1994 Plan, and 200,000 under the 1996 Plan. The Company has
granted options of 1,004,393 shares and 66,350 shares under the 1986 Plan
including the 1994 Plan, and the 1996 Plan, respectively, through September 30,
1997. 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.
A summary of the status of the Company's stock option plans at September
30, 1997, 1996 and 1995 and changes during the years then ended is presented in
the table and narrative below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
Wtd Avg Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price Shares Ex Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 810,594 $ 5.21 773,663 $ 4.52 659,715 $4.17
Granted 40,301 12.80 85,451 11.39 189,188 5.41
Exercised* (120,621) 4.26 (42,418) 2.46 (57,423) 3.09
Expired (12,886) 6.81 (6,102) 5.46 (17,817) 5.72
Outstanding at end of period 717,388 5.77 810,594 5.21 773,663 4.52
Exercisable at end of period 498,499 4.56 495,754 4.39 353,541 4.26
Wtd avg fair value of options granted $5.92 $4.38 N/A
</TABLE>
*Includes 34,320, 6,538 and 14,574 shares surrendered in conjunction with the
exercise of stock options in 1997, 1996 and 1995 respectively.
Options which are exercisable at September 30, 1997, amounting to 498,499
of the 717,388 options outstanding at September 30, 1997, have exercise prices
between $1.05 and $14.25, with a weighted average exercise price of $4.56 and a
weighted average remaining contractual life of four years. The remaining 218,889
options which are not exercisable, have exercise prices between $4.69 and
$15.68, with a weighted average exercise price of $8.54 and a weighted average
remaining contractual life of six years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rates 5.9% - 6.4% 5.6% - 6.6%
Dividend yield 1.2% 1.5%
Life of option 5 years 5 years
Share price volatility 46.7% 35.0%
</TABLE>
(c) Other Benefits--The Company does not provide postretirement or
postemployment benefits to its employees.
21
<PAGE> 14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
To Meridian Diagnostics, Inc.:
We have audited the accompanying consolidated balance sheets of MERIDIAN
DIAGNOSTICS, INC. and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the three years in the period ended September 30, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
November 7, 1997
22
<PAGE> 15
TEN YEAR SUMMARY
(Dollars in thousands except per share data and number of employees)
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Selected Financial And Operating Data For the Years Ended September 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $35,229 $29,391 $25,110 $21,877 $16,171 $14,003 $11,085 $ 8,478 $6,213 $5,647
Cost of Sales 12,298 8,967 8,009 7,518 5,098 4,582 3,973 3,467 2,590 2,271
- --------------------------------------------------------------------------------------------------------------------------------
Gross Margin 22,931 20,424 17,101 14,359 11,073 9,421 7,112 5,011 3,623 3,376
Percent of Sales 65.09% 69.49% 68.10% 65.64% 68.47% 67.28% 64.16% 59.11% 58.31% 59.78%
Operating Expenses
Research &
Development 1,502 1,499 1,432 1,433 1,165 1,157 1,102 908 844 982
Sales & Marketing 7,223 5,991 5,229 4,747 3,716 3,166 2,564 1,649 1,240 1,145
General &
Administrative 4,296 4,420 3,864 3,365 2,667 2,482 2,090 1,637 1,407 1,341
- --------------------------------------------------------------------------------------------------------------------------------
Total Operating
Expenses 13,021 11,910 10,525 9,545 7,548 6,805 5,756 4,194 3,491 3,468
- --------------------------------------------------------------------------------------------------------------------------------
Operating Income 9,910 8,514 6,576 4,814 3,525 2,616 1,356 817 132 (92)
Percent of Sales 28.13% 28.97% 26.19% 22.00% 21.80% 18.68% 12.23% 9.64% 2.12% -1.63%
Other Income
Licensing &
Related Fees 14 45 103 0 55 55 55 55 55 55
Interest Income 1,037 379 436 254 57 50 144 210 303 269
Interest Expense (1,196) (390) (1,135) (1,092) (179) (89) (10) (15) (21) (26)
Cost of Withdrawn
Stock Offering 0 0 0 0 (405) 0 0 0 0 0
Other, Net (54) 345 (20) 8 48 (27) (21) 16 (4) (1)
- --------------------------------------------------------------------------------------------------------------------------------
Total Other
Income (Expense) (199) 379 (616) (830) (424) (11) 168 266 333 297
- --------------------------------------------------------------------------------------------------------------------------------
Minority Interest in
Earnings of Subsidiary 0 0 0 0 0 0 (7) (7) 0 0
Earnings Before
Income Taxes 9,711 8,893 5,960 3,984 3,101 2,605 1,517 1,076 465 205
Income Taxes 3,729 3,601 2,436 1,543 1,212 952 559 391 148 10
- --------------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 5,982 $ 5,292 $ 3,524 $ 2,441 $ 1,889 $ 1,653 $ 958 $ 685 $ 317 $ 195
- --------------------------------------------------------------------------------------------------------------------------------
Percent of Sales 16.98% 18.01% 14.03% 11.16% 11.68% 11.80% 8.64% 8.08% 5.10% 3.45%
Cash Dividends
Declared & Paid per
Common Share* $0.19 $0.16 $0.10 $0.08 $0.06 $0.05 $0.05 0 0 0
Primary Weighted
Average Number of
Common Shares
Outstanding* 14,342 14,667 12,355 12,277 12,264 12,222 12,129 12,031 12,031 12,031
Primary Earnings Per
Common Share* $0.42 $0.36 $0.29 $0.20 $0.15 $0.13 $0.08 $0.06 $0.03 $0.02
Fully Diluted Weighted
Average Number of
Common Shares
Outstanding* N/A N/A 14,542 N/A N/A N/A N/A N/A N/A N/A
Fully Diluted Earnings
Per Common Share* N/A N/A $0.28 N/A N/A N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $57,491 $54,751 $34,569 $32,329 $26,247 $14,099 $10,997 $10,555 $9,397 $8,969
Cash & Marketable
Securities 21,736 19,743 8,919 8,832 9,476 1,810 1,590 2,704 4,198 3,628
Capital Expenditures 1,579 1,245 2,472 1,426 718 1,999 934 165 153 855
Net Working Capital 33,570 29,332 15,670 13,000 13,759 5,164 4,046 4,452 5,373 4,683
Shareholders' Equity 32,639 29,568 18,878 13,232 11,617 10,676 9,519 8,998 8,313 7,996
Return on Beginning
Shareholders' Equity 20.23% 28.03% 26.63% 21.01% 17.69% 17.37% 10.65% 8.24% 3.96% 2.50%
Year-End Stock Price 11.88 13.38 8.08 5.18 5.50 6.13 2.49 .97 1.35 2.05
Number of Employees 178 173 156 138 125 115 105 100 94 97
Sales per Employee 198 170 161 159 129 122 106 85 66 58
Net Income per Employee 34 31 23 18 15 14 9 7 3 2
</TABLE>
*As adjusted for stock splits and stock dividends.
23
<PAGE> 16
COMMON STOCK INFORMATION
NASDAQ National Market System Symbol: "KITS"
Approximate number of record holders: 1,125
The following table sets forth by calendar quarter the high and low sales
prices of the Common Stock on the NASDAQ National Market System, as adjusted
for stock dividends and stock splits.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, 1997 1996
QUARTER ENDED: HIGH LOW HIGH LOW
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31 13 1/2 10 1/8 12 1/4 7 3/4
March 31 13 3/4 10 3/8 11 3/8 9 1/8
June 30 11 5 15 1/2 8 7/8
September 30 12 5/16 7 5/8 15 3/8 10 1/2
</TABLE>
24
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Omega Technologies, Inc., an Ohio corporation
2. Meridian Diagnostics Corporation, an Ohio corporation
3. Meridian Diagnostics Europe, s.r.l., an Italian corporation
4. Meridian Diagnostics FSC, Inc., a Barbados corporation
<PAGE> 1
Exhibit 23
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
reports included in and incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statements File No.'s 333-18979,
33-38488, 33-78868, 33-89214 and 33-65443.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
December 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 10,523,191
<SECURITIES> 11,213,144
<RECEIVABLES> 10,789,501
<ALLOWANCES> 166,742
<INVENTORY> 4,651,687
<CURRENT-ASSETS> 37,841,180
<PP&E> 14,808,729
<DEPRECIATION> 6,359,499
<TOTAL-ASSETS> 57,490,890
<CURRENT-LIABILITIES> 4,270,803
<BONDS> 20,581,193
0
0
<COMMON> 2,393,852
<OTHER-SE> 30,245,042
<TOTAL-LIABILITY-AND-EQUITY> 57,490,890
<SALES> 35,228,872
<TOTAL-REVENUES> 35,228,872
<CGS> 12,297,850
<TOTAL-COSTS> 12,297,850
<OTHER-EXPENSES> 13,020,696
<LOSS-PROVISION> 68,491
<INTEREST-EXPENSE> 1,195,773
<INCOME-PRETAX> 9,711,445
<INCOME-TAX> 3,729,360
<INCOME-CONTINUING> 5,982,085
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,982,085
<EPS-PRIMARY> .42
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
FORWARD LOOKING STATEMENTS STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
from civil litigation in many instances for forward-looking statements. In order
to take advantage of the Act, such statements must be accompanied by meaningful
cautionary statements that identify important factors that could cause actual
results to differ materially from those that might be projected. This Exhibit is
being filed in order to allow the Company to take advantage of the new
provisions of this Act by providing the following cautionary statements:
RISK FACTORS AFFECTING THE COMPANY
- ----------------------------------
The Company's business operations and strategy are subject to a number of
uncertainties and risks which could adversely affect its performance in the
future. Among these are the following:
One of the Company's main growth strategies is the acquisition of other
companies and/or product lines in the disposable diagnostic test kits business.
Although previous acquisitions have been successful to date, there can be no
assurance that additional acquisitions will be consummated or that, if
acquisitions are consummated, they will be successful. Acquisitions require a
significant commitment of corporate resources, management attention and capital
which, in certain cases, could exceed that available to the Company. In
addition, the benefits expected from such acquisitions will not be achieved
fully unless the operations of the acquired entities are successfully integrated
with those of the Company.
The diagnostic test industry is characterized by ongoing technological
developments and changing customer requirements. The Company's success and
continued growth depend, in part, on its ability 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.
While the Company has introduced over twenty new products since 1991, there can
be no assurance that it 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.
Approximately 29% of the Company's net sales for fiscal 1997 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, in
particular, the recent strengthening of the dollar. The Company cannot assure
that sales of certain products made under endemic conditions in specific
geographic areas during fiscal 1997 will continue in fiscal 1998. 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.
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.
Many of the Company's competitors have greater financial and other resources
than the Company. These resources could give them an advantage in price and
service areas.
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
<PAGE> 2
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.
