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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, 1998.
[ ] 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 (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates is $56,996,875
based on a closing sale price of $6.25 per share on December 14, 1998. As of
December 14, 1998, 14,383,918 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 1998 furnished to
the Commission pursuant to Rule 14a-3(b) as specified and portions of the
Registrant's Proxy Statement filed with the Commission for its 1999 Annual
Meeting as specified 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 17
Item 4 - Submission of Matters to a Vote of Security Holders 18
Part II
Item 5 - Market for Registrant's Common Equity
and Related Stockholder Matters 18
Item 6 - Selected Financial Data 19
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Item 7A - Quantitative and Qualitative Disclosures About Market Risk 19
Item 8 - Financial Statements and Supplementary Data 19
Item 9 - Disagreements on Accounting and Financial Disclosure 20
Part III
Item 10 - Directors and Executive Officers of the Registrant 20
Item 11 - Executive Compensation 20
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 20
Item 13 - Certain Relationships and Related Transactions 20
Part IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 20
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PART I.
ITEM 1.
BUSINESS
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 and
water treatment facilities. The Company markets over 170 products representing
five major disease states through a direct sales force in the United States and
Italy, supplemented by a network of national and international distributors.
International sales in more than 60 countries were 27% of total fiscal 1998
sales, with about 59% 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 product lines in fiscal 1993 and 1994 respectively from
Johnson & Johnson for approximately
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$3.4 million each, the June 1996 acquisition of the enteric product line of
Cambridge Biotech Corporation for approximately $6.6 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.
November 1998 Acquisition
On November 5, 1998, Meridian acquired all of the outstanding
Common Stock of Gull Laboratories, Inc. The acquisition was done through a
merger transaction in which a wholly-owned subsidiary of Meridian was merged
into Gull and all of Gull's outstanding 8,016,012 shares of Common Stock were
exchanged for $2.25 per share, subject to any rights of dissenting shareholders.
Gull's common stock was listed on the American Stock Exchange and Gull filed
regular reports with the Securities and Exchange Commission.
Gull develops, manufactures and markets diagnostic test kits and
materials designed to detect past or present infection caused by certain
microbial agents such as viruses, bacteria and protozoa and to detect certain
autoimmune disorders. The products are based on established immunological assay
methods including indirect immunofluorescent antibody assay (IFA), enzyme-linked
immunosorbent assay (ELISA), immunodiffusion and Western Blot. Gull also sells
Bloodgrouping and HLA tissue typing reagents in the European market. Gull's
products are used by private laboratories and hospital clinical laboratories
worldwide.
Through its wholly-owned subsidiary, Biodesign, Incorporated, Gull also
distributes, manufactures and sells bioreagents and other related products to
both the industrial and scientific communities throughout the world. Biodesign
has its own direct sales force for sales to key customers in the United States
but principally uses telemarketing and direct mailings to market its products
worldwide. Biodesign also provides certain key raw materials for use in Gull's
products.
Gull also supplies proficiency challenge materials to the College of
American Pathologists (CAP) which provides the principal proficiency and
accreditation service for U.S. clinical laboratories. Sales to CAP in 1997, 1996
and 1995 were $2,377,054, $2,776,045 and $2,718,761, or 11%, 11% and 10% of the
Company's sales, respectively. The benefits of the CAP contracts go beyond
increased direct sales. Gull's management believes that its reputation for high
quality products is enhanced in clinical laboratories which participate in CAP
proficiency testing programs. As such, Gull will devote significant resources to
recapturing CAP sales lost in 1997 and to securing additional commitments to
supply materials for future CAP surveys as well as other contract manufacturing
business.
Meridian plans to phase-out Gull's manufacturing activities in Europe
and Salt Lake City, Utah and transfer those activities to its Cincinnati
facilities. Meridian expects that the
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integration of Gull will result in a net decrease of about 107 employees from
the 179 persons which Gull reported it employed as of December 31, 1997. In
addition to the financial statements of Gull found in its reports on Form 10-K
for the year ended December 31, 1997 and Forms 10-Q for the quarters ended March
31, 1998 and June 30, 1998, Meridian will file certain financial statements and
pro forma financial data relating to the acquisition of Gull in a Form 8-K on or
before January 19, 1999.
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 are present, the body responds by producing an
antibody. The antibody binds specifically with the antigen in a lock-and-key
fashion and initiates a biochemical reaction to attempt to neutralize and,
ultimately, to eliminate the antigen. The ability of an antibody to bind with a
specific antigen provides the basis for immunodiagnostic testing.
Immunodiagnostic testing detects the presence of specific infectious
diseases through "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 by less highly
trained personnel and completed in minutes or hours.
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 and water
treatment facilities.
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
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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:
o Developing New Product Applications from Core Technologies and
Formats. The Company employs a market-driven product
development strategy to adapt or enhance diagnostic testing
technologies and product formats in response to newly
identified disease states and customer demands for
improvements in product accuracy, simplicity, speed and
cost-efficiency. The Company accomplishes this by monitoring
existing markets, interacting closely with its customers and
recognizing emerging diseases and therapies. Since 1991, the
Company has developed and introduced 27 internally developed
products.
o 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. In November 1998
Meridian completed the acquisition of Gull Laboratories, Inc.
reported above.
o 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 1993 to $8.9 million in fiscal 1998 and represented 27%
of total consolidated sales in fiscal 1998.
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o 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 300 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 and 1998 several additional exclusive multiple-year
contracts were signed with other consolidated healthcare
providers.
o 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
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. In April 1995, the Company introduced
the first immunodiagnostic test for toxigenic E. coli, a
bacteria found in inadequately cooked meats as well as many
other food products. 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.
o 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.
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PRODUCTS
The Company has expertise in the development and manufacture of
products based on multiple core diagnostic technologies, each of which enables
the visualization and identification of antigen/antibody reactions for specific
pathogens. As a result, the Company is able to develop and manufacture
diagnostic tests in a variety of formats that satisfy customer needs and
preferences, whether in a hospital, commercial or reference laboratory or
alternate site location. These technologies include enzyme immunoassay,
immunofluorescence, particle agglutination, membrane filtration/concentration,
immunodiffusion, complement fixation and chemical stains.
Enzyme Immunoassay (EIA). Products incorporating the EIA technology
achieve extremely high levels of accuracy in detecting disease-related antigens
or antibodies through the use of special color-based enzyme-substrate reactions.
The Company utilizes this technology in its multiple test format, the
Premier(TM) product for large volume users, and in its single test formats, the
ImmunoCard(R) and Monolert(R) products, 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 fluorescent 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.
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) and Spin-CON.
The following products were acquired in the November 1998 acquisition
of Gull Laboratories, Inc.:
- Fifteen immuno-fluorescent assays
- Twenty-four enzyzme immuno assays
- Six agglutination assays
- Over twenty red blood cell agglutination assays
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The Company's product line, including the Gull acquisition, consists of
over 170 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 $33 per test. A
discussion of Company's key products and their competitive advantage appears in
the following table:
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INFECTIOUS DISEASE CATEGORY KEY PRODUCT(S) PRODUCT APPLICATION
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PARASITIC DISEASES ECOFIX, ECOSTAIN, Spin-CON,
- - Giardiasis Para-Pak(R), Premier(TM),
- - Cryptosporidiosis Para-Pak ULTRA, Products for the diagnosis and
- - Amebiasis Macro-CON(R), Merifluor(R) collection, preservation,
- - Lyme Disease transportation and concentration of
parasites.
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GASTROINTESTINAL DISEASES
- - Stomach Ulcers (H. pylori) Premier, ImmunoCard(R), U.S. patients make 20 million annual
Premier Platinum(R) visits to their physicians for gastric
distress. The H. pylori bacteria has
been associated with more than 90% of
duodenal ulcers and may be related to
cancer of the stomach.
- - Toxigenic E. Coli Premier, E. coli is a potentially lethal
ImmunoCard STAT!(TM) bacteria that infects undercooked food
and can cause kidney failure.
- - Antibiotic-associated Diarrhea Premier,ImmunoCard, Toxin producing strains of C.
(C.difficile) Meritec(TM), Cytoclone(R) difficile can cause PMC
(pseudomembranous colitis) that
results in rapid colon degeneration.
- - Pediatric Diarrhea (Rotavirus, ImmunoCard, Meritec, These viral diseases, which cause
Adenovirus) Rotaclone(R), Adenoclone(R) rapid dehydration, are transmitted
ImmunoCard STAT! rapidly through pediatric populations
in hospitals, schools and daycare
settings.
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RESPIRATORY DISEASES
- - Pneumonia (Mycoplasma pneumoniae) ImmunoCard, MeriStar(R) Pneumonia is the fifth leading cause
of death worldwide, 20% of which is
caused by Mycoplasma pneumoniae
- - Valley Fever (Coccidioides Premier Fungal pathogens can cause flu-like
immitis) Immunodiffusion, complement illness and/or severe pneumoniae, that
fixation reagents 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 Chlamydia is the leading sexually
transmitted disease.
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VIRAL DISEASES
- - Infectious Mononucleosis ImmunoCard STAT!, Monolert(R), Infectious mononucleosis, a viral
MonoSpot Latex(R), disease common among young
adolescents, is transmitted easily
from person-to-person.
- - Herpes simplex Virus (HSV1 and Premier Oral Herpes infections affect up to
HSV2) Merifluor 80% of certain populations. Genital
Herpes and can be life-threatening to
newborns.
- - Cytomegalovirus Merifluor Cytomegalovirus infections are
Premier potentially deadly in transplant
procedures and among immunocomprised
blood recipients.
- - Varicella-Zoster virus Merifluor Varicella-Zoster virus is the cause of
Premier 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, o Hospital Laboratories
introduced two new products that resulted in easier processing, safer o Reference Laboratories
handling and reduced processing time of the specimen and lower cost o Veterinary Laboratories
disposal of transport container.
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Historically, a physician-performed endoscopy, an extremely o Hospital Laboratories
uncomfortable and expensive procedure, was employed to diagnose o Reference Laboratories
gastric distress. The Company's tests allow accurate, quick o Veterinary Laboratories
diagnoses utilizing patient blood, serum or feces. In May 1998, the o State Health Laboratories
Company received clearance to market Premier Platimum HpSA(TM) the only
totally non-invasive test to diagnose active H. Pylori infection in
symptomatic patients. The Company is the only manufacturer to provide
testing formats which accommodate both small and large volume users.
In November 1995, introduced the first 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 o Hospital
Laboratories detecting respiratory diseases. The products are a rapid test o Reference Laboratories
providing results in only ten minutes. The Premier Coccidioides o State Health Laboratories
product provides increased accuracy over common diagnostic o Veterinary Laboratories
methods, allowing for a safer, more effective treatment.
Market leader with a broad range of products.
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The product allows for rapid screening for the presence of urinary o Hospital Laboratories
tract infection. Therapy can be rapidly administered, often while o Reference Laboratories
the patient is still in the physician's office. o Physicians' Office Laboratories
o Public Health Laboratories
Both product formats enable rapid, accurate testing.
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o Hospital Laboratories
The Company provides a broad range of innovative technologies o Reference Laboratories
including Monolert which use synthetic peptides to detect the virus o Physicians' Office Laboratories
which causes mononucleosis. o Student Health Laboratories
Premier HSV(TM) detects both HSV1 and HSV2 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 and Elisa 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 products 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 through national and international independent
distributors. In the United States, the Company's direct sales force consists of
three regional sales managers, three inside sales representatives and 19
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. Adjusted for the Gull acquisition, the Company has nearly 80
independent distributors in more than 70 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 seven years Meridian has developed internally 27 new
products. In February 1998, a patent was granted for Premier Platinum HpSA(TM).
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 1996, fiscal 1997 and fiscal 1998, the Company spent
$1,499,000, $1,502,000 and $1,994,000, 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 and water treatment facilities. No
end-use customer comprised more than 5% of the Company's sales in fiscal 1998.
Two distributors together accounted for more than 32% of the Company's fiscal
1998 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. Meridian Diagnostics
Europe achieved ISO 9001 certification in fiscal 1998.
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 did 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 21 of its products
including a patent for Premier Platinium HpSA(TM) issued in February 1998. 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.
14
<PAGE> 15
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.
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
15
<PAGE> 16
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 4, 1998, the Company had 192 full-time employees,
including 60 in sales, marketing and technical support, 84 in manufacturing, 20
in research and product development and 25 in administration and finance.
Sixty-four of the Company's employees hold scientific degrees.
Gull had approximately 139 employees at the time Meridian acquired it
on November 5, 1998. Meridian expects that once Gull is integrated that the net
increase in employees resulting from the acquisition will be approximately 72
persons.
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's discussion of this issue in its "Management's Discussion
and Analysis of Financial Condition and Results of Operations", appearing on
page 12 of the Registrant's Annual Report to Shareholders for 1998 is
incorporated herein by reference.
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 completed construction of a new warehouse in October 1994
and additional manufacturing and administrative space in September 1995.
16
<PAGE> 17
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.
In January 1998, the Company purchased 2.1 acres of land including a
6,400 square foot single story building. This property joins the Company's
current complex on the west side making it an ideal property for future
expansion.
In the Gull acquisition, Meridian acquired Gull's executive offices and
principal U.S. manufacturing facilities located in two buildings totaling 33,000
square feet in Salt Lake City, Utah. The facilities house modern offices,
production and product development facilities. The headquarters facilities are
financed by a long-term mortgage with an unrelated third party that is secured
by the land and the buildings.
Gull's subsidiary, Biodesign Incorporated, rents a 4,500 square foot
facility that houses administration, distribution and manufacturing facilities
in Kennebunk, Maine under a lease that expires in 1998. It is expected that
Biodesign will renew its lease for an additional one year period and then move
to a larger facility in 1999 to facilitate additional growth.
Gull rents its European headquarters facility in Bad Homburg, Germany
from Fresenius AG under a three year agreement expiring in October 2000. The
facility includes approximately 14,000 square feet of administrative,
manufacturing and distribution capabilities. Gull expects to secure replacement
facilities involving less square footage.
Gull also rents approximately 5,800 square feet of a facility in
Belgium that houses administration, distribution, and limited manufacturing
facilities. Substantially all of the space has been vacated and Gull is looking
for a new tenant to assume the lease. Gull also rents a small sales office in
France.
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 that its properties are suitable and adequate for
its activities and that 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.
ITEM 3.
LEGAL PROCEEDINGS
Management is not aware of any pending or threatened litigation, claims
or assessments, asserted or unasserted, against Meridian or its subsidiaries.
17
<PAGE> 18
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 1998.
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 22 of the Registrant's Annual Report to Shareholders for 1998 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 dividends of $.05 per share for the first three
quarters of fiscal 1998 and the Board of Directors expressed its intention to
continue that rate during fiscal 1999.
18
<PAGE> 19
ITEM 6.
SELECTED FINANCIAL DATA
"Ten Year Summary" on page 23 of the Registrant's Annual Report to
Shareholders for 1998 is incorporated by reference. Long-term obligations are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$20,595,439 $20,581,193 $20,722,700 $12,435,593 $14,683,369
</TABLE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing on page 9 of the Registrant's Annual Report to
Shareholders for 1998 is incorporated herein by reference.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
"Quarterly Financial Data" on page 22 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 1998, are
incorporated herein by reference:
Consolidated Balance Sheets as of September 30, 1998 and 1997.
Consolidated Statements of Earnings for the years ended September 30,
1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1998, 1997 and 1996.
19
<PAGE> 20
Consolidated Statements of Cash Flows for the years ended September 30,
1998, 1997 and 1996.
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. 26
II. Valuation and Qualifying Accounts for the years ended 27
September 30, 1998,1997 and 1996.
</TABLE>
All other supplemental schedules are omitted due to the absence of
conditions under which they are required or because the information is shown in
the Consolidated Financial Statements or Notes thereto.
ITEM 9.
DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Items 10., 11., 12., and 13. of Part III are incorporated by reference
to the Registrant's Proxy Statement for its 1999 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.
20
<PAGE> 21
(a) (3) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit Filing Status
-------------- ---------------------- -------------
<S> <C> <C>
3.1 Articles of Incorporation, including amendments a
3.2 Code of Regulations b
4 Indenture between the Company and Star Bank, c
National Association, as Trustee, relating to the
Company's 7% Convertible Subordinated Debentures
due 2006
10.1 First Refusal Agreement b
10.2 Amendment to the First Refusal Agreement d
10.3 License Agreement dated October 6, 1983 with Marion b
Laboratories, Inc.
10.5 Sublicense Agreement dated June 17, 1993 among e
Johnson & Johnson, the Scripps Research Institute
and the Company Concerning certain Patent Rights
10.6 Assignment dated June 17, 1993 from Ortho e
Diagnostic Systems Inc. to the Company concerning
certain Patent Rights
10.7 Agreement dated January 24, 1994 between Meridian f
Diagnostics, Inc. and Immulok, Inc.
10.8 Asset Purchase Agreement dated June 24, 1996 g
between Cambridge Biotech Corporation and Meridian
Diagnostics, Inc.
10.9 Merger Agreement among Gull Laboratories, Inc., h
Meridian Diagnostics, Inc. Fresenius AG and
Meridian Acquisition Co. dated as of September 15,
1998
10.10* Savings and Investment Plan, as amended i
10.11* Savings and Investment Plan Trust j
10.12* 1986 Stock Option Plan k
10.13* 1990 Directors' Stock Option Plan l
10.14* 1994 Directors' Stock Option Plan m
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C>
10.15* 1996 Stock Option Plan n
10.16* Salary Continuation Agreement for John A. Kraeutler o
10.17 First Amendment to Merger Agreement Among Gull p
Laboratories, Inc., , Meridian Diagnostics, Inc.
Fresenius AG and Meridian Acquisition Co.
13 1998 Annual Report to Shareholders Filed herewith (1)
21 Subsidiaries of the Registrant Filed herewith
23 Consent of Independent Public Accountants Filed herewith
27 Financial Data Schedule Filed herewith
99 Forward Looking Statements Statement Filed herewith
</TABLE>
- ------------
(1) Only portions of the 1998 Annual Report to Shareholders specifically
incorporated by reference in this Form 10-K are filed herewith. A supplemental
paper copy of the 1998 Annual Report to Shareholders has been provided to the
Securities and Exchange Commission for informational purposes only.
*Management Compensatory Contracts
22
<PAGE> 23
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 Form 8-K filed with the Securities and Exchange
Commission on September 17, 1998.
i. 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.
j. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1994.
k. Registration Statement No. 33-89214 on Form S-8 filed with the
Securities and Exchange Commission on April 5, 1995.
l. Registration Statement No. 33-38488 on Form S-8 filed with the
Securities and Exchange Commission on December 28, 1990.
m. Registration Statement No. 33-78868 on Form S-8 filed with the
Securities and Exchange Commission on May 12, 1994.
n. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1996.
o. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1995.
23
<PAGE> 24
p. Company's Report on Form 8-K filed with the Securities and Exchange
Commission filed on November 11, 1998
(b) REPORTS ON FORM 8-K.
The Company filed a Form 8-K on September 17, 1998 to report that it
entered into a definitive agreement dated September 15, 1998 to acquire Gull
Laboratories, Inc. through a merger transaction.
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, 1998 William J. Motto
Chairman of the Board
of Directors and Chief Executive
Officer (Principal Executive
Officer)
24
<PAGE> 25
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 Directors and December 29,1998
- ----------------------------- Chief Executive Officer (Principal
William J. Motto Executive Officer)
/s/ JOHN A. KRAEUTLER President and Chief Operating December 29, 1998
- ---------------------------- Officer, Director
John A. Kraeutler
/s/ GERARD BLAIN Executive Vice President, Secretary and December 29,1998
- ---------------------------- Chief Financial Officer (Principal
Gerard Blain Financial Officer and Principal
Accounting Officer)
/s/ JAMES A. BUZARD Director December 29,1998
- ----------------------------
James A. Buzard
/s/ GARY P. KREIDER Director December 29,1998
- ----------------------------
Gary P. Kreider
Director December 29,1998
- ----------------------------
Robert J. Ready
/s/ JERRY L. RUYAN
- ----------------------------
Jerry L. Ruyan Director December 29, 1998
</TABLE>
25
<PAGE> 26
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 5, 1998. 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 5, 1998
26
<PAGE> 27
SCHEDULE II
Meridian Diagnostics, Inc.
and Subsidiaries
Valuation and Qualifying Accounts
Years Ended September 30, 1998, 1997 and 1996
<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, 1998:
- ------------------------------
Allowance for Doubtful Accounts $166,742 $26,550 $6,674 $(28,959) $171,007
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
</TABLE>
27
<PAGE> 1
<TABLE>
<CAPTION>
Exhibit 13
SELECTED FINANCIAL DATA
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(Dollar and share amounts in thousands, except for per share data and number of employees)
SUMMARY OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------
Years Ended September 30, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 33,169 $ 35,229 $29,391 $ 25,110 $ 21,877
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 22,519 22,931 20,424 17,101 14,359
Operating expenses 14,168 13,021 11,910 10,525 9,545
- --------------------------------------------------------------------------------------------------------------------------
Operating income 8,351 9,910 8,514 6,576 4,814
% of sales 25.2% 28.1% 29.0% 26.2% 22.0%
Other income (expense) (297) (199) 379 (616) (830)
- --------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 8,054 9,711 8,893 5,960 3,984
Income taxes 3,096 3,729 3,601 2,436 1,543
Net earnings $ 4,958 $ 5,982 $ 5,292 $ 3,524 $ 2,441
% of sales 14.9% 17.0% 18.0% 14.0% 11.2%
- --------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ .34 $ .41 $ .36 $ .28 $ .19
Number of employees 192 178 173 156 138
Cash dividends declared and
paid per common share $ .22 $ .19 $ .16 $ .10 $ .08
Diluted weighted average number of
shares outstanding 14,703 14,661 14,758 14,507 12,521
Return on beginning shareholders' equity 15.2% 20.2% 28.0% 26.6% 21.0%
Net sales growth--increase/(decrease) (5.8%) 19.9% 17.0% 14.8% 35.3%
Per share earnings growth--increase/(decrease) (19.0%) 16.7% 24.1% 45.0% 33.3%
Refer to page 23 for Ten-Year Summary
</TABLE>
<TABLE>
<CAPTION>
NET SALES
(DOLLARS IN MILLIONS)
5-YEAR COMPOUND
GROWTH RATE
+15%
94 95 96 97 98
<S> <C> <C> <C> <C>
$21.9 $25.1 $29.4 $35.2 $33.2
<FN>
The decrease in 1998 net sales resulted from sales of E. coli products to Japan
in 1997 under endemic conditions and a one-time reduction in distributor
inventories to lower operating levels.
</TABLE>
<TABLE>
<CAPTION>
NET EARNINGS
(DOLLARS IN MILLIONS)
5-YEAR COMPOUND
GROWTH RATE
+21%
94 95 96 97 98
<S> <C> <C> <C> <C>
$2.4 $3.5 $5.3 $6.0 $5.0
<FN>
Net earnings decreased 17% and grew at a 6-year compound annual growth rate of
21% compared to a rate of 15% for sales as a result of the unusual decline in
sales as explained under Net Sales above.
</TABLE>
<TABLE>
<CAPTION>
DILUTED EARNINGS
PER SHARE
(DOLLARS)
5-YEAR COMPOUND
GROWTH RATE
+23%
94 95 96 97 98
<S> <C> <C> <C> <C>
.19 .28 .36 .41 .34
<FN>
Diluted earnings per share grew at a 5-year compound annual growth rate of 23%
compared to a rate of 15% for sales.
</TABLE>
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales decreased $2,060,000 or 6% to $33,169,000 in fiscal 1998. This
decline in sales is more than accounted for by a decrease in sales of Premier
EHEC and Premier E. coli O157:H7 of approximately $2 million as a result of an
E. coli outbreak in Japan in fiscal 1997 which did not repeat in fiscal 1998, a
reduction in sales to our major distributors, which reflects their decision to
lower inventory carrying levels, the unfavorable impact of currency from the
stronger dollar versus the Lira which equated to over $400,000, plus lower OEM
sales - primarily Epstein Barr Virus and mononucleosis products which, on a
combined basis, were down year-over-year about $450,000.
Seven new products introduced during the year, including Premier Platinum
H. pylori Specific Antigen(TM) (HpSA), five one-step products in the ImmunoCard
STAT! format and Spin-CON, a novel addition to the Company's parasitology line,
provided incremental sales revenue of over $1,400,000. HpSA, introduced in the
United States in late May, achieved consolidated sales of over $1,250,000
compared to fiscal 1997 sales of about $200,000. In addition to the new
products, Mycoplasma sales were up $254,000 or 32% as were H. pylori sales in
the Premier and ImmunoCard formats (excluding HpSA), which combined, were up
$727,000 or 48%.
The decrease in sales compared to the prior year was composed of volume of
$576,000 down 2%, lower pricing of $1,076,000 down 3% and currency down
$409,000, or 1%. Compared to fiscal 1997, the major impact was in unit volume as
explained above. The impact from pricing improved, down 3% in 1998 versus 5% in
1997, while the currency impact remained comparable.
International sales in total were $8,872,000, down $1,409,000, or 14% from
$10,281,000 in 1997 and represented about 27% of total sales compared to 29% in
fiscal 1997. This change was more than accounted for by the extraordinary E.
coli sales in the Pacific Rim in 1997, which were made under endemic conditions.
Excluding the impact of E. coli sales in fiscal 1997, international sales grew
about 5%. European operations were relatively flat due to the unfavorable
currency which offset volume growth and favorable pricing. Growth in the rest of
the world was about 28%.
Gross profit decreased $412,000 or 2% to $22,519,000 for fiscal 1998
compared to the decrease in sales of 6% resulting in an improvement in the gross
profit to sales ratio of 2.8 points to 67.9% in fiscal 1998 compared to 65.1%
for the prior year. This improvement is primarily related to the integration of
the June 1996 Cambridge acquisition which reflects the higher margin in the
Cambridge line of enteric products manufactured in the Company's facility versus
the prior year's higher costs associated with the purchase of inventory from
Cambridge during the transition period. Also contributing to the improvement was
the reduction in amortization of certain acquisition costs related to the
Cambridge supply agreement and inventory purchase agreement plus the impact of
favorable inventory variances and improved product mix, primarily in the
ImmunoCard and Premier formats. Inventory scrap/obsolescence costs increased
about $125,000 compared to the prior year from E. coli inventories which
expired.
Total operating expenses increased $1,147,000 or 9% for fiscal 1998
compared to fiscal 1997 and increased as a percent of sales to 42.7% from 37.0%
respectively. Research and development expenses increased dramatically by
$492,000 or 33% to $1,994,000 and increased as a percent of sales to 6.0%, up
from 4.3% in 1997. This increase is largely from the HpSA multi-site clinical
studies conducted during the year, clinical studies associated with the
additional claim for therapeutic monitoring and higher personnel costs. Selling
and marketing expenses increased $269,000 or 4% for fiscal 1998 reflecting the
launch expenses for the introduction of HpSA in the United States. The increase
in general and administrative expenses of $386,000 or 9% compared to the prior
year is related to increases in other administrative expenses compared to the
prior year including depreciation, computer maintenance charges and outside
service fees associated with a company-wide initiative to enhance customer
service and revisions in fiscal 1997 to the amortization of certain intangible
costs related to prior product line acquisitions. European operating expenses,
in total, adjusted for currency, increased $76,000 or 4%.
Operating income, as a result of the above, declined $1,559,000 or 16% for
fiscal 1998 versus 1997. As a percent of sales, operating income declined
approximately 3 percentage points but continued to be in excess of 25% of sales
despite the unusual sales decline and the heavy investment in HpSA.
Other expense (net) increased $98,000 for the year
ended September 30, 1998. Interest expense increased $428,000 from revisions in
fiscal 1997 to interest expense associated with certain prior period product
line acquisitions and interests costs associated with new capital leases.
Interest income improved by over 29% through improved yields on higher average
investment levels. Currency gains also increased by about $74,000 compared to
the prior year. The cumulative foreign currency translation adjustment increased
$128,000 due to the weaker dollar versus the lira at September 30, 1998 versus
September 30, 1997.
The Company's effective tax rate remained at 38.4% in 1998.
Net earnings decreased $1,024,000 or 17% to $4,958,000 for the twelve
months ended September 30, 1998 compared to $5,982,000 in the prior year and
declined about two percentage points to 15% of sales in fiscal 1998 versus 17%
in 1997.
Basic and diluted earnings per share were $.34 in fiscal 1998 compared to
$.42 and $.41 for the prior year, respectively.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased $5,838,000 or 20%, to $35,229,000 in fiscal 1997. This
growth was 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
9
<PAGE> 3
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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, or approximately $2,000,000, is
attributable to Japan 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 were 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 was largely
completed during the first quarter of fiscal 1998.
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 were anticipated and did increase significantly in fiscal 1998 as a
result of the multi-site clinical studies under way for HpSA. 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.
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(TM) Campy product. The
balance of the increase in other
10
<PAGE> 4
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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.
Basic and diluted earnings per share were $.42 and $.41, respectively, in
fiscal 1997 compared to $.37 and $.36, respectively, in 1996, an increase of
approximately 14%.
LIQUIDITY AND CAPITAL RESOURCES
On November 5, 1998, Meridian acquired all of the approximately 8 million
shares of common stock of Gull Laboratories, Inc. for $2.25 per share or
approximately $18 million, in cash. Gull, headquartered in Salt Lake City, Utah,
is engaged primarily in the development, manufacture and marketing of high
quality diagnostic test kits for the detection of infectious diseases and
autoimmune disorders. For its most recent fiscal year ended December 31, 1997,
Gull had sales of $21.7 million and a net loss of $1.8 million. In fiscal 1999,
the Company plans to close the Salt Lake City and certain other facilities,
transfer equipment, technology and manufacturing capabilities to the Company's
headquarters in Cincinnati and terminate substantially all Gull employees.
Additional purchase liabilities will be recorded for costs associated with this
shut down and consolidation of the acquired facilities.
As of September 30, 1998, the Company had cash and cash equivalents of
$19,400,000, investments of $4,369,000 and working capital of $35,895,000. Trade
accounts receivable declined $916,000 or 9% primarily from the decrease in the
month of September 1998 sales versus the prior year. Inventories increased
$917,000 or 20% due to the shortfall in projected distributor sales during the
fourth fiscal quarter.
Net cash flow provided by operating activities was $6,865,000 for the
twelve month period ended September 30 1998, up $412,000 or 6% from the prior
year period. This increase stems from the reduction in accounts receivable and
is offset in part by prepaid expenses, lower net earnings, a decrease in income
taxes payable due to timing of estimated payments and an increase in long term
deferred charges associated with the acquisition of Gull Laboratories, Inc.
Net cash provided by investing activities was $5,298,000. Capital
expenditures for the twelve months ended September 30, 1998 were $1,321,000.
Sale of investments provided $6,844,000. The Company's anticipated total capital
expenditures for fiscal 1999, including approximately $18,800,000 for the
acquisition of Gull Laboratories, Inc. representing the cash paid for Gull stock
and certain acquisition-related expenditures are estimated to be about
$22,400,000. The major expenditures, aside from the Gull stock acquisition cost
of about $18,800,000 will include the modification and remodeling of the
recently acquired property immediately adjacent to the Company's facility in
Cincinnati to accommodate the transfer of the Gull product line from Salt Lake
City to Cincinnati. Net cash used for financing activities was $3,312,000, up
$510,000 or 18%, primarily due to higher dividend payments.
On November 18, 1998, the Board of Directors declared the regular cash
dividend of $0.05 per share payable December 8, 1998 to shareholders of record
on November 25, 1998. The Board of Directors also announced its intention to
maintain the regular annual dividend rate for fiscal 1998 of $0.20 per share for
fiscal 1999, based on certain reorganization and restructuring charges during
fiscal 1999 in connection with the purchase of Gull Laboratories, a period of
several quarters of reduced profitability related to the integration of the Gull
business into the Company, plus the impact of non-cash expenses associated with
the amortization of certain intangibles to be recorded in connection with the
acquisition.
Total dividends paid during fiscal 1998, including a special fiscal 1997
year-end dividend paid on December 8, 1997 of $0.025, were $3,127,000 compared
to $2,688,000 paid in fiscal 1997.
On September 27, 1996, the Company issued $20 million of 7% convertible
subordinated debentures due in 2006. The majority of the net proceeds of
$18,755,000 were used to acquire Gull.
On June 24, 1996, the Company acquired the enteric product line of
Cambridge Biotech Corporation for approximately $6,566,000 allocated as follows:
an advance in royalties on $200,000; inventory valued at $830,000; fixed assets
valued at $200,000 and intangibles valued at $5,336,000. The intangibles
included a covenant-not-to-compete, a patent, a customer list, a supply
agreement, manufacturing procedures and goodwill. Aside from the 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 71/4% convertible subordinated debentures due in
2001. Of the originally issued $11.5 million principal amounts, all was
converted into Common Stock at $5.97 per share, except $113,000 redeemed for
cash on November 30, 1995.
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. Capital expenditures related to
the Gull acquisition as well as certain transition costs associated with
integration of the Gull operations may require some interim financing.
Currently, the
11
<PAGE> 5
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Company has an unused $15,000,000 line of credit with a commercial bank and cash
and cash equivalents and investments of approximately $5,600,000 after allowing
for the acquisition of the outstanding Gull shares.
Information concerning the maturities and fair value of the Company's
interest rate sensitive investments and debt is included in Notes 2 and 5 to the
Consolidated Financial Statements. The Company has a defined investment policy
that limits investments in instruments with only an A-1/P-1 rating which is
administered by professional investment advisors. The Company considered factors
such as interest rate risk, the maturity of the instruments and expected funding
needs and credit risks when establishing its investment policy. The Company also
monitors the investment advisor's compliance with the established investment
policy.
IMPACT OF YEAR 2000
The Year 2000 issue results from date sensitive computer programs that only
use the last two digits to refer to a year. Such computer programs may not
properly recognize years subsequent to 1999. This issue impacts the Company and
virtually every business that relies on a computer. If not corrected, system
failures or miscalculations could occur causing disruption of the Company's
operations, including among other things, a temporary inability to process
transactions or to engage in similar normal business activities.
A project team has been formed to address the Company's Year 2000
readiness. Information technology (IT) systems, such as any hardware or software
used to process daily operational data and information, as well as
non-information technology systems, such as computer chips embedded in
manufacturing, laboratory and telecommunications equipment, are being assessed
for Year 2000 compliance.
In November 1997, the Company completed a major upgrade of its computer
hardware and primary business system applications in the U.S. as part of planned
system enhancements to support the business. The cost of the upgrades, which are
Year 2000 compliant, was approximately $400,000. The Company is in the process
of indentifying and assessing the compliance of other IT and non-IT systems, and
developing remediation plans, including Meridian Diagnostics Europe, where the
business system is not yet Year 2000 compliant. These efforts are expected to be
completed by the end of the second quarter of fiscal 1999. Remediation efforts,
which are already underway may include modifications or replacement of software
and certain hardware. The Company anticipates completion of all remediation and
testing of its systems by the end of fiscal 1999.
The Company is evaluating the status of significant customers and suppliers
to determine the extent to which it is vulnerable to these third parties.
Ongoing evaluation will continue through 1999; however, the Company believes its
broad customer base and availability of alternate suppliers will mitigate the
risks associated with these third parties.
The Company has not yet developed a formal contingency plan in the event
its Year 2000 efforts are not completed in a timely manner; however, contingency
measures will be identified as systems are assessed for those requiring
remediation. For example, the contingency plan for an IT system may be to revert
to a manual system, and, for many non-IT systems, internal clocks could be reset
to an earlier date. A formal contingency plan will be developed, as required, as
remediation and testing procedures are completed in 1999.
Costs specifically associated with the Company's Year 2000 efforts have
consisted mainly of internal costs and have been immaterial. Estimated costs to
complete are not currently expected to be significant. Costs pertain primarily
to systems software and hardware replacements and upgrades and non-IT systems
replacements and upgrades.
Although the Company has not yet completed its Year 2000 efforts, after
certain upgrades and replacements are made, it believes the Year 2000 issue will
not pose significant operational problems. However, if such modifications are
not made or are not completed in time, or if a material third party fails to
properly remediate its Year 2000 issues, or if the costs are higher than
expected, the Year 2000 issue could have a material effect on the Company's
operations. While the Company is not currently aware of any significant
exposure, there can be no assurance that the Year 2000 issue will not have a
material impact on the business and operations of the Company.
The Company is currently assessing the readiness of the businesses acquired
in the Gull acquisition in connection with its overall integration plan. The
Company expects that many of the existing Gull operations and related systems,
especially in the U.S., will be integrated into the Meridian operation during
fiscal year 1999, and, therefore will not have a material impact on its business
and operations. European operations are still being assessed and analyzed.
The Company is also in the process of assessing the impact of the
conversion to the Euro on its systems and business operations. The Company does
not currently believe this conversion will have a material impact on the
business and operations, however, there can be no assurances.
RECENTLY RELEASED ACCOUNTING PRONOUNCEMENTS
In 1999, the Company will be required to adopt the provisions of Statement
of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive
Income", SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information", SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" and Statement of Position (SOP) 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". These accounting
pronouncements are not expected to have a material impact on the Company's
financial position or operating results.
12
<PAGE> 6
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Meridian Diagnostics, Inc. and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
As of September 30, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents (Note 2) $19,399,749 $10,523,191
Investments (Notes 1 and 2) 4,369,456 11,213,144
Accounts receivable, less allowance of $171,007 in 1998 and $166,742 in 1997 for doubtful accounts 9,706,678 10,622,759
Inventories (Notes 1 and 3) 5,569,068 4,651,687
Prepaid expenses and other 379,013 447,881
Deferred tax assets 339,383 382,518
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 39,763,347 37,841,180
- -----------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT (NOTE 1):
Land 332,043 259,993
Buildings and improvements 7,094,578 6,629,847
Machinery, equipment and furniture 8,524,192 7,822,671
Construction in progress 171,145 96,218
- -----------------------------------------------------------------------------------------------------------------------------------
16,121,958 14,808,729
Less--accumulated depreciation and amortization 7,312,889 6,359,499
- -----------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 8,809,069 8,449,230
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS (NOTES 1 AND 4):
Long-term receivables and other 867,379 298,301
Deferred royalties 167,771 195,355
Deferred tax assets 739,687 645,542
Deferred debenture offering costs, net of accumulated amortization
of $271,500 in 1998 and $136,500 in 1997 1,056,836 1,191,836
Covenants not to compete, and consulting agreements, net of accumulated
amortization of $3,845,337 in 1998 and $3,123,408 in 1997 1,675,258 2,397,186
License agreements, net of accumulated amortization of $945,096 in 1998 and $887,541 in 1997 390,016 247,571
Patents, tradenames and distributorships, net of accumulated amortization
of $1,486,434 in 1998 and $1,204,686 in 1997 2,684,473 2,965,615
Other intangible assets, net of accumulated amortization of $453,269 in 1998
and $303,869 in 1997 1,787,731 1,937,131
Cost in excess of net assets acquired, net of accumulated amortization
of $539,201 in 1998 and $422,880 in 1997 1,205,621 1,321,943
- -----------------------------------------------------------------------------------------------------------------------------------
Total other assets 10,574,772 11,200,480
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $59,147,188 $57,490,890
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations (Note 5) $ -- $ 73,877
Current portion of capital lease obligations (Note 5) 212,621 106,516
Accounts payable 1,049,869 839,093
Accrued payroll and payroll taxes 852,962 841,603
Other accrued expenses 1,753,249 1,244,078
Income taxes payable -- 1,165,636
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,868,701 4,270,803
- -----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS (NOTE 5) 20,033,946 20,023,880
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL LEASE OBLIGATIONS (NOTE 5) 561,493 557,313
- -----------------------------------------------------------------------------------------------------------------------------------
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; 14,382,613
and 14,365,289 shares issued and outstanding, respectively, stated at 2,397,420 2,393,852
Additional paid-in capital 20,652,802 20,571,453
Retained earnings 11,934,763 10,103,837
Cumulative foreign currency translation adjustment (301,937) (430,248)
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 34,683,048 32,638,894
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $59,147,188 $57,490,890
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</TABLE>
13
<PAGE> 7
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
Meridian Diagnostics, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
For the Years Ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $33,168,589 $35,228,872 $29,390,861
COST OF SALES 10,649,838 12,297,850 8,966,965
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 22,518,751 22,931,022 20,423,896
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 1,993,994 1,501,835 1,499,334
Selling and marketing 7,491,926 7,223,007 5,990,390
General and administrative 4,681,722 4,295,854 4,420,067
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 14,167,642 13,020,696 11,909,791
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income 8,351,109 9,910,326 8,514,105
OTHER INCOME (EXPENSE):
Licensing and related fees -- 14,131 44,638
Interest income 1,340,400 1,037,000 379,582
Interest expense (1,624,060) (1,195,773) (389,721)
Other, net (13,190) (54,239) 344,580
- -----------------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (296,850) (198,881) 379,079
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 8,054,259 9,711,445 8,893,184
INCOME TAXES (NOTE 6) 3,096,528 3,729,360 3,601,009
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 4,957,731 $ 5,982,085 $ 5,292,175
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,376,395 14,341,785 14,171,983
- ----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $.34 $.42 $.37
- ----------------------------------------------------------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,703,097 14,661,212 14,757,654
- ----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $.34 $.41 $.36
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
14
<PAGE> 8
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Meridian Diagnostics, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Number of Cumulative
Common Foreign
Shares Additional Currency
Issued and Common Paid-In Retained Translation
Outstanding Stock Capital Earnings Adjustment Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1995 12,924,814 $1,487,159 $13,895,901 $ 3,747,930 $(252,758) $18,878,232
Net earnings -- -- -- 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
Net earnings -- -- -- 4,957,731 -- 4,957,731
Cash dividends paid--
$.22 per share -- -- -- (3,126,805) -- (3,126,805)
Exercise of stock options, net 17,324 3,568 81,349 -- -- 84,917
Foreign currency translation
adjustment -- -- -- -- 128,311 128,311
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998 14,382,613 $2,397,420 $20,652,802 $11,934,763 $(301,937) $34,683,048
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
15
<PAGE> 9
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Meridian Diagnostics, Inc. and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
For the Years Ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net earnings $ 4,957,731 $ 5,982,085 $ 5,292,175
Non-cash items--
Depreciation and amortization of property, plant and equipment 1,369,929 1,239,927 1,031,915
Amortization of intangible assets and deferred royalties 1,513,931 1,776,851 975,466
Deferred income taxes (51,010) (516,432) (98,838)
Changes in current assets excluding cash/cash equivalents and investments 259,248 (2,074,864) (3,136,255)
Changes in current liabilities excluding current portion
of long-term obligations (626,010) (230,460) 1,125,939
Long-term receivable and payable (559,012) 275,409 (400,432)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,864,807 6,452,516 4,789,970
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant, and equipment acquired, net (1,320,886) (1,578,698) (1,245,144)
Sale (purchase) of short-term investments 6,843,688 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)
License agreement (200,000) -- --
Patents -- (45,317) --
Advance royalties paid (25,000) -- (37,500)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 5,297,802 1,257,140 (21,942,943)
- -----------------------------------------------------------------------------------------------------------------------------------
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
Repayment of long-term obligations (270,591) (160,429) (2,794,939)
Dividends paid (3,126,805) (2,688,078) (2,230,275)
Proceeds from issuance of common stock 84,917 52,815 53,133
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (3,312,479) (2,801,689) 13,838,455
- -----------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 26,428 (33,001) 44,106
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,876,558 4,874,966 (3,270,412)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,523,191 5,648,225 8,918,637
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,399,749 $ 10,523,191 $ 5,648,225
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Income taxes $ 3,981,989 $ 3,035,188 $ 3,109,538
Interest 1,468,823 1,458,519 148,715
Capitalized lease obligations 306,999 51,001 650,940
Conversion of 7 1/4% debentures (due 2001) to common stock,
net of amortization of deferred debenture offering costs of
$457,000 -- -- 7,409,503
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
16
<PAGE> 10
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--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, 1998 or 1997.
(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, 1998, 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--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.
During both 1998 and 1997, the impact of assuming the 1997 convertible
debentures were converted, net of the impact of pro forma, after tax interest
expense, was antidilutive. The table below shows the amounts used in computing
earnings per share and the effect on income and the weighted average number of
shares for the three years ended September 30, 1998 of dilutive potential common
stock.
<TABLE>
<CAPTION>
Year Ended
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 1998 September 30,1997 September 30,1996
Income Shares Per Share Income Shares Per Share Income Shares Per Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Net income available
to common stockholders $4,957,731 14,376,395 $.34 $5,982,085 14,341,785 $.42 $5,292,175 14,171,983 $.37
- -----------------------------------------------------------------------------------------------------------------------------------
Effect Of Dilutive Securities
Stock Options -- 326,702 -- 319,427 -- 495,105
1993 Convertible
Debentures -- -- -- -- 26,824 90,566
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
Net income available
to common stockholders
and assumed conversions $4,957,731 14,703,097 $.34 $5,982,085 14,661,212 $.41 $5,318,999 14,757,654 $.36
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 11
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(h) RESEARCH AND DEVELOPMENT COSTS--Research and development costs are charged
to earnings as incurred.
(i) REVENUE RECOGNITION--Revenue is recognized from sales when a product is
shipped. Income from licensing agreements is recognized as earned and as
stipulated by the respective agreements.
(j) ADVERTISING--Advertising costs are charged to earnings as incurred.
Expenditures for advertising in 1998, 1997 and 1996 were approximately $205,000,
$119,000 and $86,000, 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. Sales to
customers in Italy of $3,396,915 represented 10.24% of consolidated sales.
<TABLE>
<CAPTION>
Meridian Diagnostics Europe (amounts in thousands)
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $5,267 $5,766 $6,456
Operating profit 830 999 1,572
Identifiable assets 5,560 5,123 5,164
Accounts receivable 3,320 2,906 3,166
</TABLE>
Accounts receivable which are largely dependent upon funds from the Italian
government represent approximately 29% of the accounts receivable balance at
September 30, 1998.
<TABLE>
<CAPTION>
Export Sales - U.S. Operations (amounts in thousands)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $3,614 $4,515 $1,327
Accounts receivable 870 1,365 541
</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,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Customer A $4,512 (14%) $6,533 (19%) $7,534 (26%)
Customer B 5,839 (18%) 4,991 (14%) 3,436 (12%)
</TABLE>
(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, 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and money market funds $19,399,749 $ 2,431,360 $ -- $ --
Commercial paper -- 8,091,831 -- --
U.S. government direct and indirect obligations -- -- 998,281 8,753,900
Mortgage-backed securities -- -- 3,366,159 2,456,036
Common stock -- -- 5,016 3,208
- ------------------------------------------------------------------------------------------------------------------------------------
$19,399,749 $10,523,191 $4,369,456 $11,213,144
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1998 and 1997, the market value of the Company's
investments approximated cost. Government direct and indirect obligations mature
in March 2000 and have an interest rate of 5.73%. Mortgage-backed securities,
which consist of Federal National Mortgage Association securities, mature
between October 1998 and April 1999 and have interest rates ranging from 5.61%
to 5.70%.
(3) INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $1,480,457 $1,399,188
Work-in-process 1,714,492 1,652,270
Finished goods 2,374,119 1,600,229
- --------------------------------------------------------------------------------
$5,569,068 $4,651,687
- --------------------------------------------------------------------------------
</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
18
<PAGE> 12
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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, 1998 1997
- --------------------------------------------------------------------------------
<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 33,946 97,757
- --------------------------------------------------------------------------------
20,033,946 20,097,757
Less current portion -- 73,877
$20,033,946 $20,023,880
- --------------------------------------------------------------------------------
</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 $15,000,000 line of
credit which expires on June 1, 1999 and calls for interest at prime floating
less 1/2% or the LIBOR rate plus 2.25%. There were no borrowings outstanding on
the line of credit at September 30, 1998. 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 is approximately $17.8 million
based on limited trading of the debentures.
(b) CAPITAL LEASE OBLIGATIONS--At September 30, 1998, the Company has equipment
leases with cost and related accumulated depreciation of $1,153,437 and
$601,114, 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,
1998 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
1999 $264,933
2000 262,638
2001 140,295
2002 119,496
2003 55,475
Thereafter 51,247
- --------------------------------------------------------------------------------
Subtotal $894,084
Less: portion of payments representing interest 119,970
- --------------------------------------------------------------------------------
Present value of lease payments $774,114
Less: current portion 212,621
- --------------------------------------------------------------------------------
$561,493
- --------------------------------------------------------------------------------
</TABLE>
(c) COMMITMENTS--The Company has entered into various license agreements,
twenty-five 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
8%). 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 $859,000, $1,006,000 and
$500,000, respectively, for the years ended September 30, 1998, 1997 and 1996.
(6) INCOME TAXES
The provision for income taxes includes the following components:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Federal:
<S> <C> <C> <C>
Currently payable $2,496,935 $2,911,891 $2,514,903
Temporary differences--
Tax depreciation greater (less) than book depreciation (53,896) (60,251) 3,063
State franchise taxes (6,197) (53,901) (31,461)
Currently nondeductible expenses (14,018) (21,460) (15,818)
Intangible asset amortization (125,163) (94,041) (167,940)
Other, net 42,355 25,255 208,579
- ----------------------------------------------------------------------------------------------------------------------------------
2,340,016 2,707,493 2,511,326
State and local 445,236 577,339 332,715
Foreign 311,276 444,528 756,968
- ----------------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $3,096,528 $3,729,360 $3,601,009
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 13
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
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 $2,738,448 34.0% $3,301,891 34.0% $3,023,682 34.0%
Increase/(decrease) in taxes resulting from:
State and local income taxes,
net of federal income tax effect 293,216 3.6 385,085 4.0 219,592 2.5
Foreign taxes 81,195 1.0 190,877 2.0 265,793 3.0
Tax exempt income -- -- 1,015 0.0 (30,165) (0.3)
Foreign Sales Corporation benefit (91,914) (1.1) (121,044) (1.3) (75,305) (0.8)
Officers' life insurance 3,472 0.0 10,375 0.1 29,194 0.3
Other, net 72,111 0.9 (38,839) (0.4) 168,218 1.8
- ----------------------------------------------------------------------------------------------------------------------------------
Actual provision for income taxes $3,096,528 38.4% $3,729,360 38.4% $3,601,009 40.5%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of the net deferred tax assets were as follows at:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
State income taxes $ 110,862 $ 172,992
Currently nondeductible expenses 170,192 167,778
Intangible asset amortization 743,613 610,794
Other 218,633 221,836
- --------------------------------------------------------------------------------
Total $1,243,300 $1,173,400
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Other (164,230) (145,340)
- --------------------------------------------------------------------------------
Total $ (164,230) $ (145,340)
- --------------------------------------------------------------------------------
Net deferred tax assets $1,079,070 $1,028,060
- --------------------------------------------------------------------------------
</TABLE>
No valuation allowances were recorded against deferred tax assets or
deferred tax liabilities at September 30, 1998 or 1997.
(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 $311,000, $291,000, and $269,000,
during 1998, 1997 and 1996, respectively.
(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>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
As Reported $4,957,731 $5,982,085 $5,292,175
Pro Forma 4,816,815 5,886,085 5,232,175
Basic EPS:
As Reported $.34 $.42 $.37
Pro Forma .34 .41 .37
Diluted EPS:
As Reported .34 .41 .36
Pro Forma .33 .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, 1998.
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 1,011,344 shares and 224,317 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
20
<PAGE> 14
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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, 1998, 1997 and 1996 and changes during the years then ended is presented in
the table and narrative below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
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 717,388 $ 5.77 810,594 $ 5.21 773,663 $ 4.52
Granted 164,918 11.54 40,301 12.80 85,451 11.39
Exercised* (37,712) 6.49 (120,621) 4.26 (42,418) 2.46
Expired (5,979) 10.83 (12,886) 6.81 (6,102) 5.46
Outstanding at end of period 838,615 6.84 717,388 5.77 810,594 5.21
Exercisable at end of period 571,112 4.89 498,499 4.56 495,754 4.39
Wtd avg fair value of options granted $5.76 $ 5.92 $ 4.38
<FN>
*Includes 20,658, 34,320 and 6,538 shares surrendered in conjunction with the
exercise of stock options in 1998, 1997 and 1996 respectively.
</TABLE>
Options which are exercisable at September 30, 1998, amounting to 571,112
of the 838,615 options outstanding at September 30, 1998, have exercise prices
between $1.05 and $14.25, with a weighted average exercise price of $4.89 and a
weighted average remaining contractual life of four years. The remaining 267,503
options which are not exercisable, have exercise prices between $4.69 and
$15.68, with a weighted average exercise price of $11.00 and a weighted average
remaining contractual life of eight 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>
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rates 5.7% - 6.2% 5.9% - 6.4%
Dividend yield 1.7% 1.2%
Life of option 3-8 years 5 years
Share price volatility 46.5% 46.7%
</TABLE>
Subsequent to year-end, 60,000 stock options were granted which would have
an immaterial impact on the diluted EPS, if granted prior to year-end.
(c) OTHER BENEFITS--The Company does not provide postretirement or
postemployment benefits to its employees.
(8) SUBSEQUENT EVENT
On November 5, 1998, the Company acquired all of the approximately 8
million shares of common stock of Gull Laboratories, Inc. (Gull) for $2.25 per
share or approximately $18.0 million, in cash. The purchase price was financed
by cash and cash equivalents on hand. Gull, headquartered in Salt Lake City,
Utah, is engaged in the development, manufacture and marketing of high-quality
diagnostic test kits for the detection of infectious diseases and autoimmune
disorders. Gull also offers a line of instrumentation for laboratory automation
and products for blood grouping and HLA tissue typing for transplantation.
Fresenius AG, a German stock company and the former majority shareholder of Gull
("Fresenius"), is subject to certain non-competition agreements, as are certain
employees of Gull upon their leaving the employment of the Company. Amounts that
Gull owed to Fresenius, subject to various adjustments as agreed to in the
purchase agreement, will be paid to Fresenius one-half on June 15, 1999 and the
remaining half on December 31, 1999, with annual interest at 7.5%. For
accounting purposes, the acquisition was effective on October 31, 1998 and the
results of operations of Gull will be included in the consolidated results of
operations of the Company from that date forward. The resulting goodwill from
this transaction, which is currently estimated at $16 million, will be amortized
over twenty years. The goodwill estimate is preliminary, pending the results of
appraisals, an audit and further financial analysis and may include an
allocation to in-process research and development.
For its most recent fiscal year ended December 31, 1997, Gull had sales of
$21.7 million and a net loss of $1.8 million.
In fiscal 1999, the Company plans to close the Salt Lake City and certain
other facilities of Gull, sell the Gull land and buildings in Salt Lake City,
transfer equipment, technology and manufacturing capabilities to the Company's
headquarters in Cincinnati and terminate substantially all Gull employees.
Additional purchase liabilities will be recorded for costs associated with this
shut down and consolidation of the acquired facilities.
21
<PAGE> 15
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, 1998 and 1997, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the three years in the period ended September 30, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
November 5, 1998
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
Meridian Diagnostics, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
Unaudited (Amounts in thousands, except for per share data)
- ----------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended in Fiscal 1998 December 31 March 31 June 30 September 30
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $8,448 $9,542 $8,226 $6,952
Gross profit 5,523 6,426 5,860 4,709
Net earnings 972 1,703 1,429 853
Diluted earnings per common share(1) .07 .12 .10 .06
Cash dividends per common share(1,2) .07 .05 .05 .05
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
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
Diluted earnings per common share(1) .06 .08 .12 .16
Cash dividends per common share(1,2) .06 .04 .04 .04
<FN>
(1) The sum of the basic 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 1996 and 1997 year-end cash dividend of $0.025 per share
</TABLE>
22
<PAGE> 16
<TABLE>
<CAPTION>
TEN-YEAR SUMMARY
(Dollars in thousands except per share data and number of employees)
Meridian Diagnostics, Inc. and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------
Selected Financial And Operating Data For the Years Ended September 30,
1998 1997 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 33,169 $ 35,229 $ 29,391 $ 25,110 $ 21,877 $ 16,171 $ 14,003
Cost of Sales 10,650 12,298 8,967 8,009 7,518 5,098 4,582
- -------------------------------------------------------------------------------------------------------------------
Gross Margin 22,519 22,931 20,424 17,101 14,359 11,073 9,421
Percent of Sales 67.89% 65.09% 69.49% 68.10% 65.64% 68.47% 67.28%
Operating Expenses
Research &
Development 1,994 1,502 1,499 1,432 1,433 1,165 1,157
Sales & Marketing 7,492 7,223 5,991 5,229 4,747 3,716 3,166
General &
Administrative 4,682 4,296 4,420 3,864 3,365 2,667 2,482
- -------------------------------------------------------------------------------------------------------------------
Total Operating
Expenses 14,168 13,021 11,910 10,525 9,545 7,548 6,805
- -------------------------------------------------------------------------------------------------------------------
Operating Income 8,351 9,910 8,514 6,576 4,814 3,525 2,616
Percent of Sales 25.18% 28.13% 28.97% 26.19% 22.00% 21.80% 18.68%
Other Income
Licensing &
Related Fees 0 14 45 103 0 55 55
Interest Income 1,340 1,037 379 436 254 57 50
Interest Expense (1,624) (1,196) (390) (1,135) (1,092) (179) (89)
Cost of Withdrawn
Stock Offering 0 0 0 0 0 (405) 0
Other, Net (13) (54) 345 (20) 8 48 (27)
- -------------------------------------------------------------------------------------------------------------------
Total Other
Income (Expense) (297) (199) 379 (616) (830) (424) (11)
- -------------------------------------------------------------------------------------------------------------------
Minority Interest in
Earnings of Subsidiary 0 0 0 0 0 0 0
Earnings Before
Income Taxes 8,054 9,711 8,893 5,960 3,984 3,101 2,605
Income Taxes 3,096 3,729 3,601 2,436 1,543 1,212 952
- -------------------------------------------------------------------------------------------------------------------
Net Earnings $ 4,958 $ 5,982 $ 5,292 $ 3,524 $ 2,441 $ 1,889 $ 1,653
- -------------------------------------------------------------------------------------------------------------------
Percent of Sales 14.95% 16.98% 18.01% 14.03% 11.16% 11.68% 11.80%
Cash Dividends
Declared & Paid per
Common Share* $ 0.22 $ 0.19 $ 0.16 $ 0.10 $ 0.08 $ 0.06 $ 0.05
Basic Weighted
Average Number of
Common Shares
Outstanding* 14,376 14,342 14,172 12,355 12,277 12,264 12,222
Basic Earnings Per
Common Share* $ 0.34 $ 0.42 $ 0.37 $ 0.29 $ 0.20 $ 0.15 $ 0.13
Diluted Weighted
Average Number of
Common Shares
Outstanding* 14,703 14,661 14,758 14,507 12,521 12,534 12,833
Diluted Earnings
Per Common Share* $ 0.34 $ 0.41 $ 0.36 $ 0.28 $ 0.19 $ 0.15 $ 0.13
- -------------------------------------------------------------------------------------------------------------------
Total Assets $ 59,147 $ 57,491 $ 54,751 $ 34,569 $ 32,329 $ 26,247 $ 14,099
Cash & Marketable
Securities 23,769 21,736 19,743 8,919 8,832 9,476 1,810
Capital Expenditures 1,321 1,579 1,245 2,472 1,426 718 1,999
Net Working Capital 35,895 33,570 29,332 15,670 13,000 13,759 5,164
Shareholders' Equity 34,683 32,639 29,568 18,878 13,232 11,617 10,676
Return on Beginning
Shareholders' Equity 15.19% 20.23% 28.03% 26.63% 21.01% 17.69% 17.37%
Year-End Stock Price 7.63 11.88 13.38 8.08 5.18 5.50 6.13
Number of Employees 192 178 173 156 138 125 115
Sales per Employee 173 198 170 161 159 129 122
Net Income per Employee 26 34 31 23 18 15 14
<CAPTION>
Selected Financial And Operating Data For the Years Ended September 30,
1991 1990 1989
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 11,085 $ 8,478 $ 6,213
Cost of Sales 3,973 3,467 2,590
- -------------------------------------------------------------------------------
Gross Margin 7,112 5,011 3,623
Percent of Sales 64.16% 59.11% 58.31%
Operating Expenses
Research &
Development 1,102 908 844
Sales & Marketing 2,564 1,649 1,240
General &
Administrative 2,090 1,637 1,407
- -------------------------------------------------------------------------------
Total Operating
Expenses 5,756 4,194 3,491
- -------------------------------------------------------------------------------
Operating Income 1,356 817 132
Percent of Sales 12.23% 9.64% 2.12%
Other Income
Licensing &
Related Fees 55 55 55
Interest Income 144 210 303
Interest Expense (10) (15) (21)
Cost of Withdrawn
Stock Offering 0 0 0
Other, Net (21) 16 (4)
- -------------------------------------------------------------------------------
Total Other
Income (Expense) 168 266 333
Minority Interest in
Earnings of Subsidiary (7) (7) 0
Earnings Before
Income Taxes 1,517 1,076 465
Income Taxes 559 391 148
- -------------------------------------------------------------------------------
Net Earnings $ 958 $ 685 $ 317
- -------------------------------------------------------------------------------
Percent of Sales 8.64% 8.08% 5.10%
Cash Dividends
Declared & Paid per
Common Share* $ 0.05 0 0
Basic Weighted
Average Number of
Common Shares
Outstanding* 12,129 12,031 12,031
Basic Earnings Per
Common Share* $ 0.08 $ 0.06 $ 0.03
Diluted Weighted
Average Number of
Common Shares
Outstanding* 12,323 12,031 12,094
Diluted Earnings
Per Common Share* $ 0.08 $ 0.06 $ 0.03
- -------------------------------------------------------------------------------
Total Assets $ 10,997 $ 10,555 $ 9,397
Cash & Marketable
Securities 1,590 2,704 4,198
Capital Expenditures 934 165 153
Net Working Capital 4,046 4,452 5,373
Shareholders' Equity 9,519 8,998 8,313
Return on Beginning
Shareholders' Equity 10.65% 8.24% 3.96%
Year-End Stock Price 2.49 .97 1.35
Number of Employees 105 100 94
Sales per Employee 106 85 66
Net Income per Employee 9 7 3
<FN>
*As adjusted for stock splits and stock dividends.
</TABLE>
23
<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
5. Gull Laboratories, Inc., a Utah corporation
6. Biodesign Incorporated, a Maine corporation
7. Gull Laboratories GmbH, a German corporation
8. Gull Labs S.A., a Belgium corporation
9. Gull Europe S.A. Holding, a Belgium corporation
10. Gull Laboratories B.V., a Netherlands corporation
11. Gull Laboratories International Inc., a Virgin Islands 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 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000794172
<NAME> MERIDIAN DIAGNOSTICS, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 19,399,749
<SECURITIES> 4,369,456
<RECEIVABLES> 9,877,685
<ALLOWANCES> (171,007)
<INVENTORY> 5,569,068
<CURRENT-ASSETS> 39,763,347
<PP&E> 16,121,958
<DEPRECIATION> 7,312,889
<TOTAL-ASSETS> 59,147,188
<CURRENT-LIABILITIES> 3,868,701
<BONDS> 20,595,439
0
0
<COMMON> 2,397,420
<OTHER-SE> 20,652,802
<TOTAL-LIABILITY-AND-EQUITY> 59,147,188
<SALES> 33,168,589
<TOTAL-REVENUES> 33,168,589
<CGS> 10,649,838
<TOTAL-COSTS> 10,649,838
<OTHER-EXPENSES> 14,167,642
<LOSS-PROVISION> 4,665
<INTEREST-EXPENSE> 1,624,060
<INCOME-PRETAX> 8,054,259
<INCOME-TAX> 3,096,528
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,957,731
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</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 27% of the Company's net sales for fiscal 1998 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 1998 will continue in fiscal 1999. 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.
<PAGE> 2
Many of the Company's competitors have greater financial and other resources
than the Company. These resources could give them an advantage in price, service
and development of competing products.
In recent years, the federal government has been examining the nation's
healthcare system from numerous standpoints, including the cost of and access to
health care and health insurance. Proposals impacting the health care system are
constantly under consideration and could be adopted at any time. It is unclear
what effect the enactment of such proposals would have on the Company.
