SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-14902
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Incorporated under the laws of Ohio 31-0888197
- --------------------------------------- ------------------------------------
(I.R.S. Employer Identification No.)
3471 River Hills Drive
Cincinnati, Ohio 45244
(513) 271-3700
Indicate by a 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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding August 16, 1999
- ------------------------------ ----------------------------
Common Stock, no par value 14,384,076
<PAGE>
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10Q
Page(s)
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3-4
Consolidated Balance Sheets
June 30, 1999 and September 30, 1998
Consolidated Statements of Earnings 5
Three Months Ended June 30, 1999 and 1998
Nine Months Ended June 30, 1999 and 1998
Consolidated Statement of Shareholders' Equity 6
Nine Months Ended June 30, 1999
Consolidated Statements of Cash Flows 7
Nine Months Ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of 14-17
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Other Information 17
Item 5. Exhibits and Reports on Form 8-K 18
Signature 19
Exhibit 27 Financial Data Schedule 20-22
Exhibit 99 Forward Looking Statements 23
<PAGE>
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
ASSETS
($000)
CURRENT ASSETS: June 30, September 30,
1999 1998
--------- ------------
Cash and cash equivalents $ 5,007 $19,400
Investments 2,226 4,369
Accounts receivable and notes
receivable, less allowance for doubtful 12,244 9,707
accounts of $457 in 1999 and $171 in 1998
Inventories 9,385 5,569
Prepaid expenses and other 1,195 379
Deferred tax assets 874 339
------- -------
Total current assets 30,931 39,763
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Land 966 332
Buildings and improvements 10,092 7,095
Machinery, equipment and furniture 11,980 8,524
Construction in progress 514 171
------- -------
Total property, plant and equipment 23,552 16,122
Less-accumulated depreciation
and amortization 8,877 7,313
------- -------
Net property, plant and equipment 14,675 8,809
------- -------
OTHER ASSETS:
Long term receivables and other 752 1,035
Deferred tax assets -- 740
Deferred debenture offering costs,
net of accumulated amortization of $373
in 1999 and $271 in 1998 956 1,057
Other intangible assets, net of
accumulated amortization of $7,651 in 1999
and $6,730 in 1998 5,968 6,537
Cost in excess of net assets acquired,
net of accumulated amortization of
$1,353 in 1999 and $539 in 1998 17,454 1,206
------- -------
Total other assets 25,130 10,575
------- -------
TOTAL ASSETS $70,736 $59,147
======= =======
<PAGE>
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
LIABILITIES AND SHAREHOLDERS EQUITY
($000)
CURRENT LIABILITIES: June 30, September 30,
1999 1998
---------- -------------
Current portion of long-term
and capital lease obligations $ 854 $ 213
Notes payable 3,424 --
Accounts payable 2,273 1,050
Accrued expenses 5,913 2,606
Income taxes payable 609 --
-------- --------
Total current liabilities 13,073 3,869
-------- --------
LONG-TERM AND CAPITAL LEASE OBLIGATIONS 21,610 20,595
-------- --------
DEFERRED INCOME TAXES 448 --
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
1,000,000 shares authorized;
none issued -- --
Common stock, no par value,
50,000,000 shares authorized;
14,383,921 and 14,382,613 shares
issued and outstanding,
respectively, stated at 2,398 2,397
Additional paid-in capital 20,657 20,653
Retained earnings 12,933 11,935
Accumulated other comprehensive
income (loss) (383) (302)
-------- --------
Total shareholders' equity 35,605 34,683
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 70,736 $ 59,147
======== ========
<PAGE>
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
($000, Except Per Share Amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- --------------------
1999 1998 1999 1998
------- -------- --------- -------
NET SALES $13,825 $ 8,226 $ 40,199 $ 26,217
COST OF SALES 4,660 2,366 14,326 8,407
-------- -------- --------- --------
Gross profit 9,165 5,860 25,873 17,810
-------- -------- --------- --------
OPERATING EXPENSES:
Research and development 620 378 1,603 1,531
Selling and marketing 2,810 2,062 8,471 5,713
General and administrative 2,268 892 6,925 3,448
Merger integration costs 630 - 1,842 -
-------- -------- --------- --------
Total operating expenses 6,328 3,332 18,841 10,692
-------- -------- --------- --------
Operating income 2,837 2,528 7,032 7,118
OTHER INCOME (EXPENSE):
Interest income 114 240 383 888
Interest expense (646) (406) (1,837) (1,210)
Other, net (64) (4) (206) 4
-------- -------- --------- --------
Total other income (expense) (596) (170) (1,660) (318)
-------- -------- --------- --------
Earnings before income taxes 2,241 2,358 5,372 6,800
INCOME TAXES 896 929 2,217 2,696
========= ========= ========== =========
NET EARNINGS $ 1,345 $ 1,429 $ 3,155 $ 4,104
========= ========= ========== =========
BASIC WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 14,383 14,380 14,383 14,374
======== ======== ========= ========
BASIC EARNINGS PER
COMMON SHARE $ 0.09 $ 0.10 $ 0.22 $ 0.29
========= ========= ========== =========
DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 14,609 14,774 14,574 14,768
======== ======== ========= ========
DILUTED EARNINGS PER
COMMON SHARE $ 0.09 $ 0.10 $ 0.22 $ 0.28
========= ========= ========== =========
<PAGE>
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
For the Nine Months Ended June 30, 1999
(Unaudited)
($000, Except Number of Shares)
<TABLE>
<CAPTION>
Number of Accumulated
Shares Additional Other
Issued and Comprehensive Common Paid in Comprehensive Retained
Outstanding Income Stock Capital Income(Loss) Earnings Total
----------- ------------- ------- ---------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 14,382,613 - $2,397 $20,653 $(302) $11,935 $34,683
Stock Issuance 400 - - 2 - - 2
Exercised Stock Options 908 - 1 2 - - 3
Dividends - - - - - (2,157) (2,157)
Comprehensive Income
Net earnings - 3,155 - - - 3,155 3,155
Other comprehensive income
(loss)
Foreign currency
translation adjustment - (81) - - (81) - (81)
-------------
Comprehensive Income - 3,074 - - - - -
----------- ============= ------ ------- ------ ------- -------
Balance at June 30, 1999 14,383,921 $2,398 $20,657 $(383) $12,933 $35,605
========== ====== ======= ====== ======= =======
</TABLE>
<PAGE>
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
($000)
Nine Months Ended
June 30,
-------------------------------
1999 1998
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,155 $ 4,104
Non cash items:
Depreciation of property, plant
and equipment 1,563 1,018
Amortization of intangible assets
and deferred royalties 1,836 1,162
Deferred income taxes (1,037) (199)
Change in current assets and current
liabilities net of effects of acquisition:
Change in current assets excluding
cash/cash equivalents and investments 1,603 (1,021)
Change in current liabilities,
excluding current portion of
long-term obligations (51) 87
Long-term receivable and payable 208 (48)
-------- --------
Net cash provided by operating activities 7,277 5,103
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Gull Laboratories, Inc.,
net of acquired cash (18,440) --
Purchase of property, plant and equipment, net (1,813) (1,327)
Sale (purchase) of short term investments 2,143 (795)
Advance royalty -- (25)
Purchase of product license (200) --
-------- --------
Net cash used for investing activities (18,310) (2,147)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term obligations 3,354 180
Repayment of long-term obligations (4,380) (219)
Dividends paid (2,157) (2,408)
Proceeds from issuance of common stock 5 19
-------- --------
Net cash used for financing activities (3,178) (2,428)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (182) (106)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (14,393) 422
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,400 10,523
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 5,007 $ 10,945
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 1,600 $ 3,054
Interest 1,250 752
<PAGE>
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation:
---------------------
The consolidated financial statements included herein have not been
examined by independent public accountants, but include all adjustments
(consisting of normal recurring entries) which are, in the opinion of
management, necessary for a fair presentation of the results for such
periods.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the requirements of the Securities
and Exchange Commission, although the Company believes that the disclosures
included in these consolidated financial statements are adequate to make
the information not misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-K.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the year.
2. Acquisition of Gull Laboratories, Inc.:
--------------------------------------
On November 5, 1998, the Company acquired all of the common stock of Gull
Laboratories, Inc. (Gull) for approximately $18.0 million, in cash. The
purchase price was financed by cash and cash equivalents on hand. Gull 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. One June 16, 1999, the Company paid
$1,716,000 of the amounts Gull owed to Fresenius, including interest at
7.5%, as agreed to in the purchase agreement. The final settlement of
amounts Gull owed to Fresenius at October 31, 1998, are subject to various
adjustments as agreed to in the purchase agreement and are scheduled to be
paid 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 are included in the consolidated results of
operations of the Company from that date forward. The resulting goodwill
from this transaction is being amortized over twenty years.
The following unaudited pro forma combined results of operations for the
year ended September 30, 1998, the quarter ended June 30, 1999, and the
nine months ended June 30, 1998 and June 30, 1999, assume the Gull
acquisition occurred as of October 31, 1997 (dollars in thousands, except
per share data). Pro forma adjustments consist of reductions in interest
income due to the use of cash and investments to fund the acquisition,
additional amortization based on a preliminary estimate of goodwill and
adjustments to the tax provision assuming an effective tax rate of 38%, the
utilization of a portion of Gull U.S. losses and the establishment of
valuation reserves for potentially unrealizable deferred tax assets related
to pro forma operating losses.
The unaudited pro forma financial information presented is not necessarily
indicative of either the results of operations that would have occurred had
the acquisition taken place on October 1, 1997 or the results of operations
of the combined companies.
<PAGE>
<TABLE>
<CAPTION>
Year Ended 3 Months Ended 9 Months Ended
September 30, June 30, June 30,
1998 1998 1999 1998
------------ -------------- ------------ ----------
<S> <C> <C> <C> <C>
Net sales................... $ 53,535 $ 13,135 $ 41,689 $ 41,673
Net earnings (loss)......... $ 92 $ (203) $ 3,228 $ 287
Earnings (loss) per share:
Basic..................... $ 0.01 $ (.01) $ .22 $ .02
Diluted................... $ 0.01 $ (.01) $ .22 $ .02
</TABLE>
In connection with the acquisition of Gull, assets were acquired and liabilities
were assumed as follows, based upon preliminary estimates of fair values
(dollars in thousands):
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
Cash and cash equivalents........................................ $ 640
Accounts and notes receivable.................................... 3,210
Inventories...................................................... 5,065
Other current assets............................................. 640
Property, plant and equipment.................................... 5,620
Other non-current assets......................................... 675
Goodwill......................................................... 16,605
----------
32,455
Less: Cash paid for net assets.................................. 18,000
----------
$ 14,455
==========
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed.............................................. $ 4,915
Additional purchase liabilities.................................. 1,835
Debt............................................................. 5,680
Deferred tax liabilities......................................... 500
Acquisition costs................................................ 1,525
----------
$ 14,455
==========
The estimates presented above are subject to change pending the completion
of certain appraisals and other analyses of the fair value of assets
acquired and liabilities assumed, and finalization of October 31, 1998
audit adjustments. The allocation of purchase price may include an
allocation to in-process research and development. In fiscal 2000, 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
located in Salt Lake City. Additional purchase liabilities recorded to date
include approximately $1.8 million for severance and stay bonus reserves
and costs related to the shut down and consolidation of the acquired
facilities in Salt Lake City and Germany, plus certain deferred tax
liabilities.
To date, Gull research and development activities have been consolidated
into Meridian's, production facilities in Germany have been shut down,
renovation of the Cincinnati facilities is underway to accommodate the
manufacture of Gull products and certain Gull products are already being
produced in Cincinnati. Approximately one-third of the Gull positions at
the time of the acquisition have been eliminated to date.
<PAGE>
The major components of the merger integration costs incurred during the
nine-month period are as follow:
Amount
-------------
Materials for product testing $ 240
Travel and training 425
Consulting primarily related to reorganization of
European operation 275
Termination payments to distributors 430
Other 472
-------------
$ 1,842
=============
Additional costs are expected to be incurred related to materials for
product testing, travel, moving and facility closing costs. The amount of
total merger integration costs is not expected to exceed $2,500.
3. Inventories:
-----------
Inventories are comprised of the following (amounts in thousands):
June 30, 1999 September 30, 1998
-------------- ------------------
Raw materials $3,096 $1,480
Work-in-process 2,241 1,715
Finished goods 4,048 2,374
========== ===========
$9,385 $5,569
========== ===========
4. Income Taxes:
------------
The provisions for income taxes were computed at the estimated annualized
effective tax rates utilizing current tax law in effect, after giving
effect to research and experimentation credits and recognizing the benefit
of Gull post-acquisition losses incurred in Europe.
5. Earnings Per Common Share:
-------------------------
Basic earnings per share (EPS) is computed by dividing income available to
common shareholders 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.
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-month and nine-month periods ended June 30, 1999 and June 30, 1998 of
dilutive potential common stock.
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------
June 30, 1999 June 30, 1998
-------------------------------------------- --------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
In thousands,
except per share
amounts
BASIC
EARNINGS PER
SHARE
Net income available
to common shareholders
$1,345 14,383 $0.09 $1,429 14,380 $0.10
------ ------ ----- ------ ------ -----
EFFECT OF DILUTIVE
SECURITIES
Stock Options
- 226 - 394
------ ------ ----- ------ ------ -----
DILUTED EARNINGS PER
SHARE
Net income available
to common
shareholders and
assumed conversions $1,345 14,609 $0.09 $1,429 14,774 $0.10
====== ====== ===== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------------------------------------------------------------------
June 30, 1999 June 30, 1998
-------------------------------------------- --------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
In thousands,
except per share
amounts
BASIC
EARNINGS PER
SHARE
Net income available
to common shareholders
$3,155 14,383 $0.22 $4,104 14,374 $0.29
------ ------ ----- ------ ------ -----
EFFECT OF DILUTIVE
SECURITIES
Stock Options - 191 - - 394
------ ------ ----- ------ ------ -----
DILUTED EARNINGS PER
SHARE
Net income available
to common
shareholders and
assumed conversions $3,155 14,574 $0.22 $4,104 14,768 $0.28
====== ====== ===== ====== ====== ======
</TABLE>
The following table outlines items excluded from diluted EPS, as they are
anti-dilutive.
Quarter Ended Nine-Months Ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
-------- ------- ------- -------
Options 442 230 481 230
Convertible debentures 1,243 1,243 1,243 1,243
======== ======= ======= =======
1,685 1,473 1,724 1,473
======== ======= ======= =======
At both June 30, 1999 and 1998, the impact of assuming the 1996 convertible
debentures were converted, net of the impact of pro forma, after tax
interest expense, was anti-dilutive.
<PAGE>
6. Translation of Foreign Currency:
-------------------------------
Assets and liabilities of foreign operations are translated using quarter
end exchange rates. Revenues and expenses are translated using exchange
rates prevailing during the period with gains or losses resulting from
translation included in a separate component of other comprehensive income
(loss). Gains and losses resulting from transactions in foreign currencies
were immaterial.
7. Comprehensive Income:
--------------------
During 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130 (Statement 130) on "Reporting Comprehensive Income". The
Company adopted this standard effective October 1,1998. The objective of
Statement 130 is to report a measure of all changes in the equity of an
enterprise that result from transactions and other economic events of the
period other than transactions with owners ("comprehensive income").
Comprehensive income (loss) is the total of net income (loss) and all other
non-owner changes in equity. For the Company, this reporting involves gains
and losses resulting from the translation of assets and liabilities of
foreign operations.
8. Segment Information:
-------------------
During 1997, the FASB issued Statement No. 131 (Statement 131) on
"Disclosure About Segments of an Enterprise and Related Information". The
Company will adopt Statement 131 this fiscal year; however, there are no
interim reporting requirements in the initial year of adoption. The Company
is still evaluating the impact of the new disclosure requirements in light
of the Gull acquisition. New disclosure requirements, if any, will not
impact the Company's financial position or results of operation.
9. Reclassifications:
-----------------
Certain reclassifications have been made to the accompanying financial
statements to conform to the June 30, 1999 presentation.
10. Recently Issued Accounting Standards:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at
its fair value. The Company does not currently hold nor invest in any type
of derivative instruments.
In March 1998, the AICPA issued SOP98-1- "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" which requires
capitalization of external direct costs of materials and services consumed
in developing or obtaining internal-use computer software; payroll and
payroll-related costs for employees who are directly associated with and
who devote time to the internal-use computer software project (to the
extent of the time spent directly on the project); and interest costs
incurred when developing computer software for internal use. Training
costs, data conversion costs, costs incurred in the preliminary project
stage and maintenance fees should be expensed as incurred. Additionally,
significant updates and enhancements are capitalized if it is probable that
the result will be significant additional functionality or an increase in
the life of the software. The capitalization of computer software developed
or obtained for internal use should be amortized on a straight-line basis
unless another systematic and rational manner is more representative of the
use of the software. This SOP is effective for financial statements for
fiscal years beginning after December 15, 1998 (the Company's fiscal year
2000), and should be applied to internal-use computer software costs
incurred in those fiscal years for all projects, including projects in
progress upon initial application of the SOP. The Company does not expect
adoption of this accounting pronouncement will have a material impact on
the Company's financial position or operating results.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Background
- ----------
On November 5, 1998, the Company acquired all of the approximately eight million
shares of common stock of Gull Laboratories, Inc. (Gull) for approximately $18.0
million, in cash. The purchase price was financed by cash and cash equivalents
on hand. Gull 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. For accounting purposes, the acquisition was effective October
31, 1998. The results of operations of Gull are included in the consolidated
results of operations of the Company from that date forward. The resulting
goodwill from this transaction is being amortized over twenty years. See Note 2
of the Notes to Consolidated Financial Statements for further information.
Results of Operations
- ---------------------
Consolidated net sales increased $5,599,000, or 68%, to $13,825,000 for the
third fiscal quarter and increased $13,982,000, or 53%, to $40,199,000, for the
nine months ended June 30, 1999, principally from the impact of the Gull
acquisition and the continued strong performance of the Gull products. These
increases of $5,599,000 and $13,982,000 respectively, for the quarter are
comprised of volume growth of $5,179,000, or 63%, pricing of $480,000, or 6%,
and unfavorable currency of $60,000, or (1%); for the nine months, volume growth
of $12,654,000 or 48%, pricing of $1,229,000, or 5%, and currency of $99,000.
Core business product sales increased about 14% for the quarter versus the prior
year, a major turnaround from the first six months which were down 2% versus the
previous year as a result of distributor order patterns in the U.S. and Europe.
New product sales led by Premier Platinum HpSA(TM) (H. pylori) and the IC Stat!
line of products, contributed approximately $500,000 and $1,460,000 of
incremental revenues for the quarter and nine-month periods respectively. C.
difficile sales were up $169,000, or 9% for the quarter, but remained about 7%
below the prior year nine months results. All other key product groups were
performing ahead of the prior year through June 30.
Gross profit increased $3,305,000, or 56%, to $9,165,000 for the quarter and
$8,063,000, or 45%, to $25,873,000 for the nine-month period compared to the
sales increase of 68% for the quarter and 53% for the nine-month period. Gross
profit decreased as a percentage of sales to 66% from 71% for the quarter and to
64% from 68% for the nine-month period. For the quarter, the gross profit
reflects improved pricing as noted above, offset primarily by the impact of the
lower margins for Gull product sales compared to the historical Meridian margins
resulting in an overall decrease of five points as a percent of sales. These
same factors contributed to the decline in gross profit for the nine-month
period compared to the prior year. The Company expects that this drag on the
overall gross profit will continue until the Company completes the integration
of Gull's production into its Cincinnati facilities and the sellout of Gull's
Salt Lake City production, which is expected to occur in about nine months.
Gross profit in the third quarter increased six percentage points over the
second quarter primarily due to sales in the third quarter shifting to a higher
percentage of historical Meridian products.
Total operating expenses increased $2,996,000, or 90%, to $6,328,000 for the
third fiscal quarter versus the prior year, and increased to 46% of sales from
41% versus the same period last year, primarily due to the Gull acquisition.
Similarly, operating expenses for the nine-month period compared to the prior
year were up approximately 76%, and increased to 47% from 41% as a percent of
sales. Research and development costs increased $242,000 to 4% of sales,
comparable with the prior year quarter and increased $72,000, declining to 4% of
sales from 6% for the nine month period. This increase for the nine months ended
<PAGE>
June 30, 1999 reflects a combination of Gull research and development expenses
and increases in Meridian research personnel costs, largely offset by the prior
year clinical study costs associated with Premier Platinum HpSA, which was
cleared for marketing in May 1998. As of March 1, 1999, all research and
development activity was consolidated at Meridian's headquarters in Cincinnati.
Selling and marketing expenses increased $748,000, or 36%, for the third fiscal
quarter and $2,758,000 or 48%, for the nine-month period. Selling and marketing
costs declined about approximately five points from 25% of sales to 20% for the
third fiscal quarter and remained relatively flat at 21% of sales for the
nine-month period. General and administrative costs increased $1,376,000, or
154%, and increased as a percent of sales to 16% from 11% for the third quarter;
increased $3,477,000 or 101% for the nine-month period to 17% of sales versus
13% the prior year. This increase is also attributable to the Gull acquisition,
including $254,000 of amortization of Gull-related goodwill for the quarter and
$667,000 for the nine-month period. In connection with the Gull acquisition, the
Company incurred merger integration costs of approximately $630,000 during the
third fiscal quarter and $1,842,000 for the nine-month period. These costs
consist of payments made to distributors to terminate contracts in markets with
duplicate distributor agreements or in markets that will now be covered by the
Company sales forces, training, travel, product validation and consulting
charges in connection with the integration of the Gull business. Additional
merger integration costs are expected to be incurred in connection with the
ongoing integration efforts. Total merger integration costs are not expected to
exceed $2.5 million.
Operating income increased $309,000, or 12%, but declined as a percent of sales
to 21% from 31% for the quarter, and decreased $86,000, declining as a percent
of sales to 17% from 27% for the nine-month period. Excluding the merger
integration costs of $630,000 for the quarter and $1,842,000 for the nine-month
period, operating income increased $939,000, or 37% and $1,756,000, or 25%,
respectively. Other expense increased $426,000 for the third fiscal quarter and
$1,342,000 for the nine-month period. These increases are primarily related to
$366,000 in net interest expense for the quarter and $1,132,000 for the
nine-month period for Gull-related obligations coupled with the effect of a
reduction in interest income due to the use of cash and investments to acquire
Gull. The Company's effective tax rate was relatively flat at 40% for the third
quarter and up approximately one point to 41% for the nine-month period. Based
on tax planning strategies, the Company elected to record a benefit for the full
amount of post-acquisition operating losses incurred to date in Gull's foreign
operations. The increase in the tax rate over last year is due to the
amortization of Gull acquisition-related goodwill, which is not deductible for
book or tax purposes.
Liquidity and Capital Resources
- -------------------------------
The Company's cash flow requirements mainly consist of working capital for
operations, capital expenditures, dividends on common stock and debt repayment.
Net cash flows provided by operations increased $2,174,000 for the nine months
ended June 30, 1999, primarily due to cash funded by working capital items. The
total of net earnings and depreciation/amortization were relatively flat despite
approximately $1,800,000 of pretax merger integration costs incurred to date.
Net cash used for investing activities increased $16,163,000 which is more than
accounted for by cash paid during the nine-month period for the acquisition Gull
of $18,440,000 which includes transaction costs of $1,080,000 paid during the
nine-month period and is net of cash acquired of $640,000.
Net cash flows used for financing activities increased $750,000 for the nine
months, largely due to payments made on debt obligations assumed in the Gull
acquisition net of proceeds from new obligations.
Net cash flows from operations are anticipated to fund working capital
requirements for the balance of the fiscal year. The Company has an unused
$11,646,000 line of credit with a commercial bank and cash/cash equivalent and
short-term investments of $7,233,000 at June 30, 1999. For the year, the Company
expects to incur capital expenditures of approximately $4,200,000, which
<PAGE>
includes $3,000,000 for the renovation of the Cincinnati manufacturing
facilities related to the integration of Gull product manufacturing and $500,000
related to new computer systems in Europe.
Year 2000 Readiness Disclosure
- ------------------------------
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.
This assessment is substantially complete.
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 has substantially
completed its assessment of the compliance of other IT and non-IT systems in the
U.S. Remediation efforts which include modifications or replacement of software
and certain hardware. The Company anticipates completion of all remediation and
testing of its systems by December 31, 1999. The Company's current business
systems in Belgium and Germany are being replaced and the system in Italy has
been upgraded to a Year 2000 compliant version. These locations are primarily
involved in sales and distribution functions and do not manufacture product.
Non-IT systems in European locations are being assessed in connection with
planned office and warehouse relocations expected to occur prior to December 31,
1999. The Company expects that many of the existing Gull operations and related
systems in the U.S. will be integrated into the Meridian operation during the
last quarter of fiscal year 1999 and the first quarter of fiscal 2000. The
Company has also addressed the status of instrumentation equipment leased to
customers and is in the process of replacing or upgrading the equipment to the
extent it is not compliant.
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 is developing a contingency plan. The contingency plan addresses
critical business processes in the event Year 2000 efforts are not completed in
a timely manner. The contingency plans for IT systems include using manual
systems, and resetting internal clocks to an earlier date for many non-IT
systems. The contingency plan will be further expanded, as required, as
remediation and testing procedures are completed throughout the remainder of
1999.
Costs specifically associated with the Company's Year 2000 efforts to date have
consisted mainly of internal costs and capital expenditures such as systems
software and hardware replacements or upgrades and non-IT systems replacements
or upgrades and are estimated to be $750,000 when complete.
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
<PAGE>
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 also in the process of assessing the impact of the conversion to
the Euro on its systems and business operations. The conversions and upgrades of
the European systems noted above will also enable these operations to process
Euro transactions. Currently, the Company has significant sales in Europe,
certain of which are denominated in U.S. dollars. When fully adopted, the use of
a single currency in participating countries may affect pricing of transactions
due to the transparency of prices. Factors such as local taxes, freight and
handling costs, and customer preferences may eliminate the need for price
adjustments. With the acquisition of Gull and the related increase in European
sales, the Company is currently evaluating the impact of this conversion.
PART II. OTHER INFORMATION
Item 4 Other Information
On June 24, 1999, William J. Motto, a founder of the Company and Chief
Executive Officer, received The Cincinnati/Northern Kentucky 1999
Ernst & Young Entrepreneur of the Year Award in the Technology
division. This Award is sponsored nationally by Ernst & Young, USA
Today, the Kauffman Center for Entrepreneurial Leadership at the Ewing
Marion Kauffman Foundation, the Nasdaq-Amex Market Group, CNN and
CNNfn.
On July 3, 1999, The Lancet published an article entitled, "Diagnosis
of Helicobacter pylori infection with a new non-invasive antigen-based
assay," (Dr. D. Vaira, et. al.). This article reported on a study
designed to confirm the accuracy of Meridian's Premier Platinum HpSATM
(HpSA), our new test for the detection of the H. pylori antigen which
causes stomach ulcers. Approximately 500 patients were tested using
the HpSA test, the C13-Urea Breath Test and four endoscopies for H.
pylori detection. The HpSA test displayed excellent results with an
overall accuracy in excess of 90%. H. pylori infections affect up to
50% and 80% of the population in developed countries and in developing
regions, respectively. The cost to manage peptic ulcer disease has
reached $6 billion each year.
On June 25, 1999, the United States Food and Drug Administration (FDA)
gave clearance to market two diagnostic tests for the herpes simplex
virus. These tests, Premier(TM) Type-Specific HSV-1 IgG ELISA Test and
Premier Type-Specific HSV-2 IgG ELISA Test, are the first medical
tests cleared by the FDA that have been proven to distinguish Herpes
Simplex Virus (HSV) Type 1 (oral) from Type 2 (genital) herpes
infections via serological blood test methods. With the FDA clearance
of these two blood tests, discrimination between HSV-1 and HSV-2
infections now can be made routinely in any clinical laboratory.
Between 200,000 to 500,000 people contract the HSV infection, the
third most prevalent sexually transmitted disease in the United
States, annually with as many as 30 million Americans infected with
HSV-2.
On July 14, 1999, the Company announced that Premier EHEC was used to
diagnose young adults impacted by an outbreak of toxigenic E. coli in
Texas caused by the bacteria Escherichia coli (E. coli) strain O111.
Meridian's Premier EHEC assay indicated the presence of Shiga toxins,
the toxins produced by all strains of enterohemorrhagic E. coli
(EHEC).
On August 11, 1999, the Company received clearance from the United
States Food and Drug Administration to market ImmunoCard STAT!(TM) E.
coli 0157 Plus. The rapid test will detect the most prevalent
toxigenic strain of E. coli, E. coli 0157:H7, which is often
transmitted via ground beef vegetables and other foods. ImmunoCard
STAT!(TM) E. coli 0157 Plus, which can be performed in approximately
<PAGE>
10 minutes, will enable laboratories to report accurate results much
sooner than conventional culture methods that can take 24-72 hours to
process.
Item 5 Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description Page(s)
----------- ----------- -------
27 Financial Data Schedule 20-22
99 Forward Looking Statements 23
(b) Reports on Form 8-K:
None
<PAGE>
Signature:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there-unto duly authorized.
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Date: August 16, 1999
/S/ GERARD BLAIN
-------------------------------------------
Gerard Blain, Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,007
<SECURITIES> 2,226
<RECEIVABLES> 12,701
<ALLOWANCES> 457
<INVENTORY> 9,385
<CURRENT-ASSETS> 30,931
<PP&E> 23,552
<DEPRECIATION> 8,877
<TOTAL-ASSETS> 70,736
<CURRENT-LIABILITIES> 13,073
<BONDS> 22,058
0
0
<COMMON> 2,398
<OTHER-SE> 20,657
<TOTAL-LIABILITY-AND-EQUITY> 70,736
<SALES> 40,199
<TOTAL-REVENUES> 40,199
<CGS> 14,326
<TOTAL-COSTS> 14,326
<OTHER-EXPENSES> 18,841
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,837
<INCOME-PRETAX> 5,372
<INCOME-TAX> 2,217
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,155
<EPS-BASIC> .22
<EPS-DILUTED> .22
</TABLE>
EXHIBIT 99
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from
civil litigation for forward-looking statements accompanied by meaningful
cautionary statements. These statements identify important factors that could
cause actual results to differ materially from those that might be projected.
Meridian's continued growth depends, in part, on its ability to 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 approximately 70 new products since 1987, there can be no assurance
that it will be successful in the future in introducing such products on a
timely basis. Ongoing consolidations of reference laboratories and formation of
multi-hospital alliances may cause adverse changes to pricing and distribution.
One of Meridian's main growth strategies is acquisition of companies and product
lines. There can be no assurance that additional acquisitions will be
consummated or that, if consummated, will be successful and the acquired
businesses successfully integrated into Meridian's operations. The challenges
faced by the Company in integrating Gull into its operations involve greater
risks and uncertainties than prior acquisitions. While the Company is not
currently aware of any significant exposure related to the Year 2000 issue,
there can be no assurance that the Year 2000 issue will not have a material
impact on the business and operations of the Company.
