<PAGE> 1
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, 1999.
[_] 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
--- --
X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates is $69,733,000
based on a closing sale price of $7.25 per share on December 9, 1999. As of
December 9, 1999, 14,585,390 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 1999 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 2000 Annual
Meeting as specified are incorporated by reference in Parts II and III as
specified.
<PAGE> 2
MERIDIAN DIAGNOSTICS, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
<TABLE>
<CAPTION>
Part I. Page
<S> <C> <C>
Item 1. Business..................................................................................................1
Item 2. Properties...............................................................................................14
Item 3. Legal Proceedings........................................................................................15
Item 4. Submission of Matters to a Vote of Security Holders......................................................15
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................15
Item 6. Selected Financial Data..................................................................................16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................................16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...............................................16
Item 8. Financial Statements and Supplementary Data..............................................................17
Item 9. Disagreements on Accounting and Financial Disclosure.....................................................17
Part III.
Item 10. Directors and Executive Officers of the Registrant.......................................................18
Item 11. Executive Compensation...................................................................................18
Item 12. Security Ownership of Certain Beneficial Owners and Management...........................................18
Item 13. Certain Relationships and Related Transactions...........................................................18
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........................................18
</TABLE>
i
<PAGE> 3
PART I.
ITEM 1.
BUSINESS
--------
GENERAL
Meridian 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, viral, urinary tract and
respiratory infections. All of Meridian's products are used in procedures
performed in vitro (outside the body) and enhance patient well-being while
reducing total outcome costs of healthcare.
Meridian'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,
Meridian has also acquired or obtained rights to distribute a number of products
and technologies.
Meridian 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. Meridian markets over 200 products representing four
major disease states through a direct sales force in the United States, Italy,
Germany, France, Belgium and the Netherlands supplemented by a network of
national and international distributors. International sales in more than 60
countries were 34% of total fiscal 1999 sales.
ACQUISITION STRATEGY
An important facet of Meridian'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 Meridian's existing and
targeted customer base. Historically, Meridian's management has pursued the
acquisition and licensing of products and technologies that fit Meridian'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 $3,400,000 each, the June 1996 acquisition
of the enteric product line of Cambridge Biotech Corporation for approximately
$6,600,000 and numerous smaller product acquisitions and licensing arrangements.
1
<PAGE> 4
On November 5, 1998, Meridian acquired all of the outstanding common
stock of Gull Laboratories, Inc. for $19,700,000 in cash and acquisition costs
plus assumed liabilities of $17,500,000 for a total purchase price of
$37,200,000. The acquisition was done through a merger transaction in which a
wholly-owned subsidiary of Meridian was merged into Gull. 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 (EIA), immunodiffusion and Western Blot. Gull's products are
used by private laboratories and hospital clinical laboratories worldwide.
Through its wholly-owned subsidiary, BIODESIGN, Inc., 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. The benefits of the CAP
contracts go beyond increased direct sales. Management believes that its
reputation for high quality products is enhanced in clinical laboratories which
participate in CAP proficiency testing programs.
Meridian has shut down Gull's manufacturing activities in Europe and is
expected to complete the transfer of Salt Lake City, Utah production to its
Cincinnati facilities by December 31, 1999. Gull had approximately 139 employees
at the time Meridian acquired it on November 5, 1998. Meridian expects that the
integration of Gull will result in a net increase of approximately 94 Meridian
employees, a decrease of approximately 45 persons from the persons formerly
employed by Gull. On January 19, 1999, Meridian filed certain financial
statements and pro forma financial data relating to the acquisition of Gull in a
Form 8-K/A.
A key component in the success of Meridian's acquisition and licensing
of new products and technologies has been the ability of Meridian's 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 the
availability of cash through cash on hand or available lines of credit.
IMMUNODIAGNOSTICS OVERVIEW
In vitro diagnostic testing is the process of analyzing constituents
of blood, urine, stool, other
2
<PAGE> 5
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 health care 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 Meridian's products, including food testing, veterinary laboratories and
water treatment facilities.
The increasing pressures to contain total health care costs have
accelerated the increased use of diagnostic testing and the market shift to
alternate sites. With rapid and accurate diagnoses of infectious diseases,
physicians can pinpoint appropriate therapies quickly, leading to faster
recovery, shorter hospital stays and less treatment expense. In addition, these
pressures have led to a major consolidation among reference laboratories and the
formation of multi-hospital alliances that have reduced the number of
institutional customers for diagnostic products and resulted in changes in
buying practices. Specifically, multi-year exclusive or primary source marketing
or distribution contracts with institutional customers have become more common,
replacing less formal distribution arrangements of shorter duration and
involving lower product volumes. In Europe, the reexamination of health care
costs, access and funding is causing similar pressures.
3
<PAGE> 6
STRATEGY
Meridian continues to execute its long-term strategy consisting of the
following elements:
- Developing New Product Applications from Core Technologies and
Formats. Meridian 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. Meridian
accomplishes this by monitoring existing markets, interacting
closely with its customers and recognizing emerging diseases
and therapies. Since 1991, Meridian has developed and
introduced over 30 internally developed products. In the past
year, Meridian introduced six new products and added
beneficial claims to a seventh.
- Acquiring and Licensing Products and Technology. Meridian
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 Meridian'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, Meridian has
acquired, licensed or entered into supply arrangements
relating to approximately 100 products. The November 1998
acquisition of Gull accounted for 65 of the 100 products.
- Increasing International Sales. Meridian has targeted
international sales as an attractive source of growth.
Meridian has developed a strong presence in Italy through its
Italian subsidiary, Meridian Diagnostics Europe s.r.l., and
with the acquisition of Gull has an established sales force in
Germany, Belgium, France and the Netherlands. Meridian has
added management to expand its ability to serve Latin American
markets and has expanded its international distributor base to
include distributors in Argentina and China. Over the last six
years, Meridian's international sales have grown from
$2,100,000 in fiscal 1993 to $18,500,000 in fiscal 1999 and
represented 34% of total consolidated sales in fiscal 1999.
- Developing Partnerships With Consolidated Health Care
Organizations. Meridian seeks to develop strategic
partnerships with the major reference laboratories and other
consolidated health care providers. Meridian 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. During 1998 and 1999, several
exclusive multiple-year contracts were signed with
consolidated health care providers. In the fall of 1998, a
major national reference laboratory added Premier Platinum
HpSA to its test menu and actively markets HpSA to its client
list of primary care physicians and specialists. During 1999,
4
<PAGE> 7
Meridian extended or renewed supply agreements with several
major reference laboratories and other consolidated health
care providers.
- Entering New Markets and Accessing Alternate Site Markets for
Diagnostic Testing. Meridian 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. Meridian provides
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 addition, Meridian
introduced the first immunodiagnostic test for toxigenic E.
coli, a bacteria found in inadequately cooked meats as well as
many other food products. Most recently, Meridian launched its
rapid test for the detection of E. coli O157:H7 in food,
co-developed with a major U.S. research center. Meridian also
seeks strong licensing/distribution partners having sales and
marketing strengths to more effectively promote Meridian's
products into alternate site markets. Meridian believes that
its products are readily adaptable for use in alternate site
markets. Meridian has an exclusive distribution agreement with
a third party through which it distributes Meridian's urinary
tract infection product, as well as other rapid tests, to the
physician office market. Meridian continues to evaluate the
suitability of certain of its other products for the consumer
market.
- Global Sales Excellence. Meridian has launched an initiative
to improve its worldwide excellence in customer service, sales
support and technical assistance. Meridian believes that its
customers have rewarded it for the high level of customer
service and support it has provided in the past. However,
Meridian desires to provide a level of service that exceeds
the current standards of the health care industry and, most
importantly, the customer's expectations. Meridian is
implementing several customer satisfaction training programs
and information system improvements in order to achieve global
sales excellence.
PRODUCTS
Meridian 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, Meridian 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
5
<PAGE> 8
color-based enzyme-substrate reactions. Meridian 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. Meridian
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
Meridian's Meritec(TM), MeriStar(R) and MonoSpot(R) products.
Membrane Filtration/Concentration. Meridian 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 Meridian's proprietary
rapid, single-unit FiltraCheck-UTI(R) test format.
Other Technologies. Meridian utilizes other technologies that include
immunodiffusion, complement fixation and chemical stains. Meridian also
manufactures and markets specimen collection, transportation, preservation and
concentration products, such as Para-Pak(R) and Macro-CON(R) and Spin-CON.
About 65 products in four technologies were acquired in the November
1998 acquisition of Gull including:
- Fifteen immunofluorescent assays
- Twenty-four enzyzme immunoassays
- Six particle agglutination assays
- Over twenty red blood cell agglutination assays
Meridian's product line, including the Gull acquisition, consists of
over 200 medical diagnostic products representing four major disease states.
Currently, the most important product lines from the perspective of sales are
products to diagnose gastrointestinal, viral and parasitic diseases. Meridian'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:
6
<PAGE> 9
<TABLE>
<CAPTION>
INFECTIOUS KEY PRODUCT(S) PRODUCT APPLICATION
DISEASE CATEGORY -------------- -------------------
----------------
<S> <C> <C>
PARASITIC DISEASES ECOFIX(R), ECOSTAIN(TM), Products for the diagnosis and
- - Giardiasis Spin-CON(TM), collection, preservation,
- - Cryptosporidiosis Para-Pak(R), Premier(TM), transportation and concentration of
- - Amebiasis Para-Pak ULTRA, parasites.
- - Lyme Disease Macro-CON(R), Merifluor(R)
GASTROINTESTINAL
DISEASES
- - Stomach Ulcers (H. pylori) Premier, ImmunoCard(R), U.S. patients make 20 million
Premier Platinum HpSA(TM) annual visits to their physicians for
gastric distress. The H.pylori
bacteria has been associated with
more than 90% of duodenal ulcers
and may be related to cancer of the
stomach.
- - Toxigenic E. Coli Premier, E. coli is a potentially lethal bacteria
ImmunoCard STAT!(TM) that infects undercooked food and
can cause kidney failure.
- - Antibiotic-associated Premier, ImmunoCard, Toxin producing strains of
Diarrhea (C.difficile) Meritec(TM), Cytoclone(R) C.difficile can cause PMC
(pseudomembranous colitis) that
results in rapid colon degeneration.
- - Pediatric Diarrhea ImmunoCard, Meritec, These viral diseases, which cause
(Rotavirus, Adenovirus) Rotaclone(R), Adenoclone(R) rapid dehydration, are transmitted
ImmunoCard STAT! rapidly through pediatric
populations in hospitals, schools and
daycare settings.
RESPIRATORY
DISEASES
- - Pneumonia (Mycoplasma ImmunoCard, MeriStar(R) Pneumonia is the fifth leading
pneumoniae) cause of death worldwide, 20% of
which is caused by Mycoplasma
pneumoniae.
- - Valley Fever (Coccidioides Premier Immunodiffusion, Fungal pathogens can cause flu-
immittis) complement fixation like illness and/or severe
reagents pneumoniae, that are life
threatening in AIDS and other
immuno-comprised patients.
</TABLE>
<TABLE>
<CAPTION>
INFECTIOUS COMPETITIVE ADVANTAGE MARKET
DISEASE CATEGORY --------------------- ------
----------------
<S> <C> <C>
PARASITIC DISEASES Leading supplier of parasitology diagnostics. In - Hospital Laboratories
- - Giardiasis October 1995, introduced two new products that - Reference Laboratories
- - Cryptosporidiosis resulted in easier processing, safer handling and - Veterinary Laboratories
- - Amebiasis reduced processing time of the specimen and lower
- - Lyme Disease cost disposal of transport container.
GASTROINTESTINAL
DISEASES
- - Stomach Ulcers (H. pylori) Historically, a physician-performed endoscopy, - Hospital Laboratories
an extremely uncomfortable and expensive - Reference Laboratories
procedure, was employed to diagnose gastric - Veterinary Laboratories
distress. Meridian's tests allow accurate, quick - State Health Laboratories
diagnoses utilizing patient blood, serum or feces.
In May 1998, Meridian received clearance to
market Premier Platinum HpSA(TM) the only
totally non-invasive test to diagnose active
H.pylori infection in symptomatic patients. In
December 1998, Meridian received clearance to
market Premier Platinum HpSA to monitor
therapeutic response in patients with H.pylori
infection. This is the first and only noninvasive
direct procedure for the detection and monitoring
of H.pylori antigens in human stool. Meridian is
the only manufacturer to provide testing formats
which accommodate both small and large volume
users.
- - Toxigenic E. Coli 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. In August
1999, Meridian received a clearance to market
Immuno Card STAT(TM) E.coli O157 Plus which
detects E.coli O157:H7 and can be performed in
approximately ten minutes.
- - Antibiotic-associated Market leader with a broad range of products.
Diarrhea (C.difficile)
- - Pediatric Diarrhea Offers the clinician quick results which are critical
(Rotavirus, Adenovirus) in preventing the spread of these highly infectious
viruses.
RESPIRATORY
DISEASES
- - Pneumonia (Mycoplasma Meridian provides the broadest range of - Hospital Laboratories
pneumoniae) diagnostic reagents for detecting respiratory - Reference Laboratories
diseases. The products are a rapid test providing - State Health Laboratories
results in only ten minutes. The Premier - Veterinary Laboratories
Coccidioides product provides increased
accuracy over common diagnostic methods,
allowing for a safer, more effective treatment.
- - Valley Fever (Coccidioides Market leader with a broad range of products.
immittis)
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
INFECTIOUS KEY PRODUCT(S) PRODUCT APPLICATION
DISEASE CATEGORY -------------- -------------------
----------------
<S> <C> <C>
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.
VIRAL DISEASES
- - Epstein-Barr-Virus Premier EBNA, Premier Epstein-Barr-Virus, a viral disease
EBV IgG/IgM common among young adolescents,
ImmunoCard STAT!, is transmitted easily from
Monolert(R), person-to-person.
MonoSpot(R) Latex
- - Herpes simplex Virus Premier Oral Herpes infections affect up to
(HSV1 and HSV2) Merifluor 80% of certain populations.
Genital Herpes 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
Premier of chicken pox and shingles.
</TABLE>
<TABLE>
<CAPTION>
INFECTIOUS COMPETITIVE ADVANTAGE MARKET
DISEASE CATEGORY --------------------- ------
----------------
<S> <C> <C>
UROGENITAL DISEASE
- - Urinary Tract Infection The product allows for rapid screening for the - Hospital Laboratories
presence of urinary tract infection. Therapy can - Reference Laboratories
be rapidly administered, often while the patient is - Physicians' Office Laboratories
still in the physician's office. - Public Health Laboratories
- - Chlamydia Both product formats enable rapid, accurate
testing.
VIRAL DISEASES
- - Epstein-Barr-Virus Meridian provides a broad range of innovative - Hospital Laboratories
technologies including Monolert which use - Reference Laboratories
synthetic peptides to detect the virus which - Physicians' Office Laboratories
causes mononucleosis. - Student Health Laboratories
- - Herpes simplex Virus Premier HSV detects both HSV1 and HSV2
(HSV1 and HSV2) rapidly from a variety of body sites. In July
1999, Meridian received FDA clearance to
market Premier Type Specific HSV-1 IgG and
Premier Type Specific HSV-2 IgG. They are the
first medical tests cleared by the FDA that have
been proven to be able to distinguish Herpes
Simplex Virus (HSV) Type 1 (oral herpes) from
Type 2 (genital herpes) herpes infections via
serological blood test methods.
- - Cytomegalovirus Quickly detects "immediate early antigen" in a
rapid, direct Fluorescence format.
- - Varicella-Zoster virus Quickly detects the virus that causes chicken pox
in a rapid, direct Fluorescence format and EIA
format.
</TABLE>
8
<PAGE> 11
MARKETING AND SALES
Meridian's marketing efforts are focused on a continual process of
seeking ways to assist health care 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 health care system.
Meridian 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 health care delivery system have resulted in major
consolidation among reference laboratories and the formation of multi-hospital
alliances. Meridian 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
Meridian's customers and distribution network through a toll-free service
hotline; and the implementation of major marketing programs to target key
customers.
Meridian markets products through direct sales forces, both
domestically and in Italy, Germany, France, Belgium and the Netherlands, and
through national and international independent distributors. In the United
States, Meridian's direct sales force consists of three regional sales managers,
one Corporate Health System Manager, three inside sales representatives and 21
technical sales representatives. In Europe, Meridian's sales force consists of a
vice president of sales and marketing, five sales and marketing managers,
including an international sales manager who is responsible for all European
distributor activities outside of Italy, Germany, France, Belgium and the
Netherlands, two product managers, two product specialists and twenty technical
sales representatives. Where Meridian utilizes distributors, Meridian
participates in selling efforts involving key customers. Adjusted for the Gull
acquisition, Meridian has nearly 80 independent distributors in more than 60
foreign countries including key distributor relationships in Canada, Central and
South America, Mexico, Australia, New Zealand and the Pacific Rim, which are
managed directly from the United States by an international manager. Meridian's
sales in Europe, North Africa and the Middle East are shipped from Meridian
Diagnostics Europe (MDE) distribution centers in Milan, Italy and Bad Homburg,
Germany.
9
<PAGE> 12
RESEARCH AND DEVELOPMENT
Meridian's research and development activities focus on developing new
and improved diagnostic solutions. Working in conjunction with the marketing
department, Meridian's research and development department focuses its
activities on enhancements to, and new applications for, Meridian's
technologies. Over the past nine years, Meridian has developed internally over
30 new products. Meridian has patent protection on a limited number of its
products including Premier Platinum HpSA(TM). The research and development
department is proficient in a number of diagnostic technologies, each of which
can be applied to meet new product specifications that marketing has
established. Meridian'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.
Meridian 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 Meridian's quality
process through its design control mechanism which establishes manufacturing
standards and specifications. By working closely with the manufacturing
department, the same standards and specifications ensure consistent high-quality
products. Meridian 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 13 research scientists. The disciplines represented
in the group include biochemistry, immunology, mycology, bacteriology, virology
and parasitology. In fiscal 1997, fiscal 1998 and fiscal 1999, Meridian spent
$1,500,000, $2,000,000, and $2,000,000 respectively, on its research and
development activities.
CUSTOMERS
The principal customers for Meridian'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 Meridian's sales in fiscal 1999. Two
distributors together accounted for more than 25% of Meridian's fiscal 1999
sales. However, Meridian does not believe that the loss of either of these
distributors would have a material adverse effect on Meridian because of its
ability to sell to the end-use customers served by these distributors through
alternative means.
MANUFACTURING
The majority of Meridian's manufacturing is performed at its
Cincinnati, Ohio facility. After the integration of Gull production in
Cincinnati, substantially all manufacturing will be performed in Cincinnati. All
manufacturing operations are regulated by, and in compliance with, FDA- mandated
Good Manufacturing Practices for medical devices. To maintain the highest
quality
10
<PAGE> 13
standards, Meridian utilizes both external and internal quality auditors who
routinely evaluate Meridian's manufacturing processes. These audits, as well as
those conducted periodically by the FDA, may identify deficiencies. Meridian
strives to quickly evaluate, remedy and review the implementation of corrective
actions to further assure compliance with medical device regulation. Meridian's
immunodiagnostic products require the production of highly specific and
sensitive antigens and antibodies. Meridian produces substantially all of its
own requirements including monoclonal antibodies and polyclonal antibodies, plus
a variety of fungal, bacterial and viral antigens. For many of its raw materials
acquired from third parties, Meridian has developed dual sources. As a result,
Meridian believes it has access to sufficient raw materials for its products.
Meridian believes it has sufficient manufacturing capacity for anticipated
growth. Meridian Diagnostics Europe s.r.l. achieved ISO 9002 certification in
fiscal 1998 and Meridian is working towards achieving ISO 9000 certification in
the U.S. in fiscal year 2000.
COMPETITION
The market for diagnostic tests is a multi-billion dollar international
industry which is highly competitive. Many of Meridian's competitors are larger
with greater financial, research, manufacturing and marketing resources.
Important competitive factors of Meridian'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
Meridian's product lines do not reflect technological advances, Meridian'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 health care 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 Meridian, 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 Meridian 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
Meridian owns or licenses U.S. and foreign patents for approximately 30
of its products, including a patent for Premier Platinium HpSA(TM) issued in
February 1998. The patents or licenses for most of 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,
Meridian may be vulnerable to competitors who successfully replicate Meridian's
production and
11
<PAGE> 14
manufacturing techniques and processes. Meridian's laboratory and research
personnel are required to execute confidentiality agreements designed to protect
Meridian's proprietary products.
Meridian 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. Meridian's products are regulated by
the Food & Drug Administration as "devices" pursuant to the Federal Food, Drug
and Cosmetic Act (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 premarket approval
procedures.
Each of the products currently marketed by Meridian has been cleared by
the FDA pursuant to the 510(k) clearance process or is exempt from such
requirements. Meridian 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 Meridian'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. During fiscal 1999, Meridian
received approval for several new product registrations in Japan. Currently,
Meridian is supporting foreign product registrations in Japan, China and
Argentina via the distributors in the respective countries.
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
12
<PAGE> 15
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 Meridian's laboratory customers (but not for Meridian itself), Meridian
considers the requirements of The Clinical Laboratory Improvement Act of 1988 in
the design and development of its products.
Meridian is a conditionally 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. Meridian 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 September 30, 1999, Meridian had 283 full-time employees,
including 89 in sales, marketing and technical support, 136 in manufacturing, 14
in research and product development and 44 in administration and finance.
Eighty-three of Meridian'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, the net
increase in Meridian's employees resulting from the acquisition will be
approximately 94 persons.
Meridian 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 Meridian's employees is represented by a labor organization and
Meridian is not a party to any collective bargaining agreement. Meridian has
never experienced any strike or work stoppage and considers its relationship
with its employees to be good.
THE YEAR 2000 ISSUE
Meridian's discussion of this issue in its "Management's Discussion and
Analysis of Financial Condition and Results of Operations", appearing on page 10
of the Registrant's Annual Report to Shareholders for 1999 is incorporated
herein by reference.
13
<PAGE> 16
ITEM 2.
PROPERTIES
----------
Meridian'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
Meridian.
Meridian also owns 2.1 acres of land including a 6,400 square foot
single story building. This property joins Meridian's current complex on the
west side making it an ideal property for future expansion.
In September 1999, Meridian began remodeling to provide an additional
9,000 square feet of manufacturing space within the existing main facility. This
project is expected to be substantially completed by December 31, 1999.
The distribution center in Italy 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 Meridian Diagnostics Europe s.r.l.
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 on approximately five acres of land in Salt Lake City, Utah. The
mortgage on the land and facilities was refinanced under Meridian's line of
credit. Both the land and the building are expected to be sold following the
completion of the transfer of production to Cincinnati, Ohio.
BIODESIGN rents a 10,000 square foot facility that houses
administration, distribution and manufacturing facilities in Saco, Maine under a
lease that expires in 2006.
The German distribution center is located in a facility in Bad Homburg,
Germany owned by Fresenius AG, Gull's former parent company. The facility
includes approximately 14,000 square feet of administrative, manufacturing and
distribution capabilities. The distribution center is expected to move to a new
location by April 2000.
Gull also rents approximately 4,000 square feet in Belgium in a
facility that houses administration and planned future distribution facilities.
The lease expires in 2002. Gull also rents small sales offices in France and the
Netherlands.
Meridian 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.
14
<PAGE> 17
ITEM 3.
LEGAL PROCEEDINGS
-----------------
Management is not aware of any material pending or threatened
litigation, claims or assessments, asserted or unasserted, against Meridian or
its subsidiaries except those arising in the ordinary course of business.
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 1999.
PART II.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------
"Common Stock Information" on page 27 and "Quarterly Financial Data" on
page 25 of the Registrant's Annual Report to Shareholders for 1999 are
incorporated herein by reference. There are currently no external restrictions
on cash dividend payments.
Meridian 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 November 19, 1997, Meridian 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. Meridian paid quarterly dividends of $0.05 per share in
fiscal 1998 and fiscal 1999.
On November 17, 1999 the Board of Directors voted to increase the
quarterly cash dividend rate from $.05 per share to $.06 per share, an increase
of 20%.
15
<PAGE> 18
ITEM 6.
SELECTED FINANCIAL DATA
-----------------------
"Ten Year Summary" on page 26 of the Registrant's Annual Report to
Shareholders for 1999 is incorporated by reference. Long-term obligations
(excluding current portion) are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$21,366 $20,595 $20,581 $20,723 $12,436
</TABLE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing on page 10 of the Registrant's Annual Report
to Shareholders for 1999 is incorporated herein by reference.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Information concerning the maturities and fair value of Meridian's
interest-rate-sensitive investments and debt is included in Notes 3 and 6 to the
Consolidated Financial Statements. Meridian 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. Meridian considered factors
such as interest rate risk, the maturity of the instruments and expected funding
needs and credit risks when it established its investment policy. Meridian also
monitors the investment advisor's compliance with the established investment
policy.
Meridian's exposure to interest risk is minimal due to the relatively
small amount of investments and variable rate debt. Meridian is exposed to
currency rate fluctuations as a result of its distribution operations in Europe.
To date, exchange rate gains and losses have been immaterial and no hedging
activities have been employed.
16
<PAGE> 19
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
"Quarterly Financial Data" on page 25 of the Registrant's Annual Report
along with the Consolidated Financial Statements of the Registrant shown on
pages 14 through 17 of its Annual Report to Shareholders for 1999, are
incorporated herein by reference:
Consolidated Balance Sheets as of September 30, 1999 and 1998.
Consolidated Statements of Earnings for the years ended September 30,
1999, 1998 and 1997.
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended September 30,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
The following schedules are filed herewith:
<TABLE>
<CAPTION>
Schedule
No. Description Page
--- ----------- ----
<S> <C> <C>
Report of Independent Public Accountants. 24
II. Valuation and Qualifying Accounts for the years ended 25
September 30, 1999, 1998 and 1997.
</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.
17
<PAGE> 20
PART III
Items 10., 11., 12., and 13. of Part III are incorporated by reference
to the Registrant's Proxy Statement for its 2000 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 Meridian.
(a) (3) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit Filing Status
-------------- ---------------------- -------------
<S> <C> <C>
3.1 Articles of Incorporation, including a
amendments
3.2 Code of Regulations b
4 Indenture between Meridian and Star Bank, c
National Association, as Trustee, relating to
Meridian's 7% Convertible Subordinated
Debentures due 2006
10.1 First Refusal Agreement b
10.2 Amendment to the First Refusal Agreement d
10.3 License Agreement dated October 6, 1983 b
with Marion Laboratories, Inc.
10.5 Sublicense Agreement dated June 17, 1993 e
among Johnson & Johnson, the Scripps
Research Institute and Meridian
Concerning certain Patent Rights
</TABLE>
18
<PAGE> 21
<TABLE>
<S> <C> <C>
10.6 Assignment dated June 17, 1993 from e
Ortho Diagnostic Systems Inc. to Meridian
concerning certain Patent Rights
10.7 Agreement dated January 24, 1994 between f
Meridian Diagnostics, Inc. and Immulok,
Inc.
10.8 Asset Purchase Agreement dated June 24, g
1996 between Cambridge Biotech
Corporation and Meridian Diagnostics, Inc.
10.9 Merger Agreement among Gull Laboratories, h
Inc., 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
10.15* 1996 Stock Option Plan n
10.16* Salary Continuation Agreement for John A. o
Kraeutler
10.17 First Amendment to Merger Agreement p
Among Gull Laboratories, Inc., Meridian
Diagnostics, Inc. Fresenius AG and
Meridian Acquisition Co.
10.18* 1999 Directors' Stock Option Plan q
10.19* 1996 Stock Option Plan Amended and q
Restated Effective January 22, 1999
10.20 Dividend Reinvestment Plan Filed herewith
Filed herewith
</TABLE>
19
<PAGE> 22
<TABLE>
<S> <C> <C>
13 1999 Annual Report to Shareholders Filed herewith(1)
21 Subsidiaries of the Registrant r
23 Consent of Independent Public Accountants Filed herewith
27 Financial Data Schedule Filed herewith
99 Forward Looking Statements Statement Filed herewith
</TABLE>
*Management Compensatory Contracts
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. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1992.
e. Meridian's Form 8-K filed with the Securities and Exchange Commission
on June 17, 1993.
f. Meridian's Forms 8-K filed with the Securities and Exchange Commission
on February 8, 1994 and April 6, 1994.
g. Meridian's Form 8-K filed with the Securities and Exchange Commission
on July 2, 1996.
h. Meridian's Form 8-K filed with the Securities and Exchange Commission
on September 17, 1998.
i. Meridian'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. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1994.
- --------
(1) Only portions of the 1999 Annual Report to Shareholders
specifically incorporated by reference in this Form 10-K are filed herewith. A
supplemental paper copy of the 1999 Annual Report to Shareholders has been
provided to the Securities and Exchange Commission for informational purposes
only.
20
<PAGE> 23
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. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1996.
o. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1995.
p. Company's Report on Form 8-K filed with the Securities and Exchange
Commission filed on November 11, 1998.
q. Meridian's Proxy Statement filed with the Securities and Exchange
Commission on December 21, 1998.
r. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1998.
(b) REPORTS ON FORM 8-K.
None.
21
<PAGE> 24
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 23, 1999 William J. Motto
Chairman of the Board
of Directors and Chief Executive
Officer (Principal Executive
Officer)
22
<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 December 23,1999
- ------------------------------------------ Directors and Chief Executive
William J. Motto Officer (Principal Executive
Officer)
/s/ John A. Kraeutler President and Chief Operating December 23, 1999
- ------------------------------------------ Officer, Director
John A. Kraeutler
/s/ Gerard Blain Executive Vice President, December 23,1999
- ------------------------------------------ Secretary and Chief Financial
Gerard Blain Officer (Principal Financial
Officer and Principal Accounting
Officer)
/s/ James A. Buzard Director December 23,1999
- ------------------------------------------
James A. Buzard
/s/ Gary P. Kreider Director December 23,1999
- ------------------------------------------
Gary P. Kreider
/s/ Robert J. Ready Director December 23,1999
- ------------------------------------------
Robert J. Ready
</TABLE>
23
<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 16, 1999. 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 Meridian's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and regulations
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 16, 1999
24
<PAGE> 27
SCHEDULE II
Meridian Diagnostics, Inc.
and Subsidiaries
Valuation and Qualifying Accounts
(Amounts in Thousands)
Years Ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Balance
Balance at Charged to Charged at End
Beginning Costs and to Other of
Description of Period Expenses Accounts Deductions Other(1) Period
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1999:
Allowance for Doubtful Accounts $171 $150 $7 $303 $355 $380
YEAR ENDED SEPTEMBER 30, 1998:
Allowance for Doubtful Accounts $166 $27 $7 $(29) $ - $171
YEAR ENDED SEPTEMBER 30, 1997:
Allowance for Doubtful Accounts $127 $69 $2 $(32) $ - $166
- ------------------------------- --------------- ---------------- --------------- ----------------- --------------- ---------------
YEAR ENDED SEPTEMBER 30, 1999:
Inventory Reserves $857 $667 $ - $1,242 $731 $1,013
YEAR ENDED SEPTEMBER 30, 1998:
Inventory Reserves $416 $1,029 $ - $588 $ - $857
YEAR ENDED SEPTEMBER 30, 1997:
Inventory Reserves $177 $691 $ - $452 $ - $416
- ------------------------------- --------------- ---------------- --------------- ----------------- --------------- ---------------
YEAR ENDED SEPTEMBER 30, 1999
Merger Integration Accruals $ - $3,415 $ - $3,258 $ - $157
</TABLE>
- --------
(1) Balances reflect acquired valuation accounts related to the Gull
Laboratories, Inc. acquisition.
25
<PAGE> 1
Exhibit 10.20
INTRODUCING AUTOMATIC DIVIDEND REINVESTMENT PLUS...
TO SHAREHOLDERS OF
MERIDIAN DIAGNOSTICS, INC.
As a shareholder, you qualify for special purchases of additional stock
of the Company through a service offered by Fifth Third Bank called the
SHAREHOLDER INVESTMENT PLAN.
THE PLAN CONSISTS OF TWO PARTS:
1. AUTOMATIC DIVIDEND REINVESTMENT
Automatic Dividend Reinvestment is a convenient way for you to
have your quarterly cash dividends automatically reinvested for you into
additional shares of the Company's stock.
PLUS . . .
2. VOLUNTARY CASH INVESTMENT
Voluntary Cash Investment is an opportunity for you to make
cash investments at any time of as little as $25 but not more than $1,000 per
month to purchase additional shares of the Company's stock.
You may elect to participate in either one of these two options or in
both. No matter which you select, the Plan provides you with a savings in
brokerage commissions. Fifth Third Bank will combine your dividends or monthly
cash investments with those of other participating shareholders and will make a
single bulk purchase of the stock each month. The reduction in commission costs
on this purchase will be passed on to all participants.
The Shareholder Investment Plan offers you the opportunity to:
- put dividend income to work immediately
- put every dollar and penny to work promptly in full and
fractional shares
- realize the long-range benefit of dollar-cost averaging
- make inexpensive regular investments of modest sums of money
- reduce your brokerage commission costs
- invest, simply and safely, by mail through Fifth Third Bank.
<PAGE> 2
- 2 -
QUESTIONS & ANSWERS ABOUT THE SHAREHOLDER INVESTMENT PLAN
HOW DOES IT WORK?
Fifth Third Bank will act as agent for all participants. The Bank will
accumulate all investment monies until a bulk purchase of stock is made. After
the purchase (at least once each month), the Bank will credit your account with
your proportionate number of full and fractional shares.
WHAT IS A BULK PURCHASE AND HOW DOES IT BENEFIT ME?
A bulk purchase is when the Bank purchases stock for participants in a
single transaction. Because purchases for participants in the Plan are
consolidated, brokerage costs are likely to be lower than would be the case if
participants made individual purchases.
WHAT ELSE DOES THE BANK DO?
Beyond buying your shares in a bulk purchase, the Bank holds your stock
certificates in safekeeping until you terminate your participation in the Plan.
This protects you against loss, theft or accidental destruction of your
certificates. The Bank also sends you a confirmation of each transaction with a
detailed statement of your account, including the number of full and fractional
shares that you own to four decimal places.
DO I RETAIN ALL SHAREHOLDER RIGHTS ON SHARES PURCHASED FOR ME BY YOUR PLAN?
Yes, you receive stock splits and stock dividends. Rights offerings
will be sold and the net proceeds used to buy more shares for you. For proxy
purposes, full shares acquired under this Plan may be voted by you.
IS THERE A MINIMUM NUMBER OF INVESTMENTS I MUST MAKE IN ANY TWELVE-MONTH PERIOD?
You must make at least four investments a year by automatically
reinvesting your dividends or making voluntary cash investments. Otherwise you
will be notified in writing that the Plan will be terminated if an investment is
not made within 30 days. If you do not make such an investment, you will be sent
a certificate for your full shares and a check for your fractional share
interest and your account will be closed.
IS THERE A FEE FOR THE SERVICE?
<PAGE> 3
- 3 -
Yes, you pay a nominal service fee for the Bank's costs related to
record-keeping, handling, postage and custody. The fee is:
- 5% per automatic dividend reinvestment (minimum $1, maximum
$3)
- $3 per transaction for Voluntary Cash Investments that you may
make at any time.
WHAT DOES THE BANK DO WITH CASH DIVIDENDS PAID ON SHARES IT HAS PURCHASED FOR MY
ACCOUNT?
Cash dividends on shares acquired through the Plan are automatically
used to purchase more full and fractional shares for your account at no charge
to you other than your pro-rata share of brokerage commissions.
CAN I DISCONTINUE THE PLAN AT ANY TIME?
Yes, simply write the Bank requesting that your account be closed. You
will promptly receive a certificate for your full shares and a check for the net
proceeds of the sale of your fractional share interest. Or, at your option, the
Bank will sell both your full and fractional share interest. There is no service
charge or penalty for terminating your account except for brokerage costs.
HOW DO I PARTICIPATE?
Simply sign the enclosed Authorization form.
CHECK BOX A if you wish BOTH Automatic Dividend Reinvestment and
Voluntary Cash Investment.
CHECK BOX B if you wish ONLY to make Voluntary Cash Investments.
Please mail the authorization from in the pre-addressed envelope
enclosed for your convenience. ANY CASH INVESTMENT THAT YOU WISH TO MAKE NOW
(MINIMUM $25; MAXIMUM $1,000) MAY BE MADE BY CHECK OR MONEY ORDER, PAYABLE TO
FIFTH THIRD BANK.
Please mail authorization form, checks or any inquiries to:
<PAGE> 4
- 4 -
Fifth Third Bank
Shareholder Investment Plan
P.O. Box 478
Cincinnati, Ohio 45273-9611
(513)579-6248
<PAGE> 5
- 5 -
TERMS AND CONDITIONS OF PARTICIPATION IN THE SHAREHOLDER
INVESTMENT PLAN
1. FREQUENCY, MANNER AND EFFECT OF INVESTMENTS BY A PARTICIPANT
A Participant may elect: (a) to invest all cash dividends on the
Participant's stock in the Company; (b) to make monthly or other periodic
voluntary cash investments of not less than $25 and not more than $1,000; or (c)
a combination of both. Each investment of cash dividends shall be made by the
Bank as soon as practical after the payment of the dividend. Each voluntary cash
investment by a Participant shall be made by check to the order of The Fifth
Third Bank mailed to the Bank with the account identification stub furnished by
the Bank for that purpose. A Participant who has elected both to invest cash
dividends and make voluntary cash investments may discontinue making such
voluntary cash investments at any time. If a Participant does discontinue his
voluntary cash investments, the Bank will continue to reinvest all cash
dividends received by it on behalf of the Participant until the account is
terminated as provided in Item 10 below.
2. FREQUENCY AND MANNER OF PURCHASES OF STOCK BY THE BANK
As agent for the Participant, the Bank will apply all funds received by
it from or on behalf of the Participant (after deducting the charges for
services referred to in Item 11 hereof) to the purchase of shares of stock of
the Company for the account of the Participant. Funds received by the Bank
representing voluntary cash investments of Participants will be accumulated by
the Bank and applied by the Bank to a bulk purchase of stock of the Company at
least once each calendar month. Funds representing cash dividends or the
proceeds of sale of rights received by the Bank on behalf of Participants will
be applied to a bulk purchase of stock of the Company as soon as practicable
after such funds are received by the Bank. The Bank may make such purchases on
any securities exchange where such stock is traded, in the over-the-counter
market, or in negotiated transactions and on such terms as to price, delivery
and otherwise as the Bank in its sole discretion may determine. In making
purchases for a Participant's account, the Bank will combine the Participant's
funds with those of other Participants. It is understood that government
regulations may require the temporary curtailment or suspension of purchases of
shares under the Plan, and the Bank shall not be accountable for its inability
to make purchases at such times.
3. PRICE TO PARTICIPANT
The price at which the Bank shall be deemed to have acquired shares for
the Participant's account shall be the average price (including brokerage
commissions) of all shares purchased by the Bank for Participants with respect
to each bulk purchase effected by the Bank in accordance with Item 2 above.
<PAGE> 6
- 6 -
4. CUSTODY OF STOCK AND ISSUANCE OF STOCK CERTIFICATES
The Bank will segregate and hold certificates for shares of stock of
all Participants in the name of its nominee. No stock certificates will be
issued to a Participant unless the Participant requests such certificates in
writing or terminates the account as hereinafter provided. No certificates for
fractional shares will be issued; however, fractional shares purchased for the
account of the Participant and dividends and distributions on such fractional
shares will be credited to the Participant's account.
5. STATEMENTS TO PARTICIPANTS
Each Participant will receive a statement as soon as practicable after
every transaction affecting his account indicating (a) net dollars invested and
price per share; (b) the number of full and fractional shares just purchased;
(c) total full and fractional shares held in his account; and (d) a history for
the year-to-date of all transactions affecting the Participant's account.
6. STOCK DIVIDENDS AND STOCK SPLITS
Any shares representing stock dividends or stock splits distributed by
the Company on shares of stock held by the Bank for the Participant's account
will be credited to the account of the Participant.
7. RIGHTS TO PURCHASE SHARES OR OTHER SECURITIES
If the Company should make available to its shareholders rights to
purchase additional shares or other securities, the Bank will sell such rights
accruing to the shares held by the Bank for the Participant's account and will
apply the net proceeds of such sale to the purchase of stock in accordance with
Item 2 above.
8. VOTING OF SHARES HELD BY BANK
In connection with any matters to be voted upon by shareholders, the
Bank will vote any full shares that it holds for you, as a Participant, in
accordance with the proxy returned to you.
9. OTHER INFORMATION TO BE FURNISHED TO PARTICIPANTS
It is understood that the automatic reinvestment of dividends under
this Plan does not relieve the Participant of any income tax which may be
payable on such dividends. Annually, the Bank will provide the Participant with
information for tax purposes with respect to the dividends on the shares held by
the Bank for the Participant's account. As soon as practicable after the date of
distribution
<PAGE> 7
- 7 -
of any stock dividend or shares resulting from a stock split, the Bank will
furnish the Participant with a statement reflecting such transaction.
10. TERMINATION
A Participant may terminate the account at any time by adequate notice
in writing to the Bank and the Bank may terminate the Plan upon notice in
writing mailed to each Participant.
The Bank may terminate the account of a Participant who has elected to
make only voluntary cash investments and who does not make at least four such
investments during any twelve-month period, if the Participant does not make an
investment within 30 days after written notice from the Bank.
In the event of termination by either the Bank or the Participant, the
Bank will send the Participant certificates for the full shares in the account
or if the Participant elects, will sell such shares and remit the proceeds less
brokerage commissions and any applicable taxes. With respect to any fractional
share interest, the Bank will pay cash determined in the same manner as provided
above with respect to sale of full shares.
11. SERVICE CHARGE PAYABLE BY PARTICIPANT
The charges for the services of the Bank rendered to a Participant
hereunder shall be $3 for each voluntary cash investment and 5% per automatic
dividend reinvestment (minimum $1, maximum $3). Cash dividends on shares held by
the Bank for your account are automatically reinvested in additional shares at
no charge. No change will be made in the Bank's service charge without at least
30 days prior written notice to each Participant.
12. RESPONSIBILITIES OF THE BANK
The Bank shall not be liable for any acts done in good faith or for any
good faith omission to act, including, without limitation, any claims of
liability (a) arising out of failure to terminate the Participant's account on
the death of such Participant prior to receipt of written notice by the Bank of
such death; (b) with respect to the price or prices at which shares are
purchased or sold for the Participant's account; (c) concerning the times the
purchases or sales are made; and (d) the value of the shares acquired for the
Participant's account.
FIFTH THIRD BANK
SHAREHOLDER INVESTMENT PLAN
P.O. BOX 478
CINCINNATI, OHIO 45273-9611
<PAGE> 1
Exhibit 13
Meridian Diagnostics, Inc.'s
1999 Annual Report
<PAGE> 2
<TABLE>
<CAPTION>
EXHIBIT 13
SELECTED FINANCIAL DATA
(Dollar amounts in thousands, except for per share data and number of employees)
OPERATIONAL EFFICIENCY CREATES OPPORTUNITIES FOR EARNINGS GROWTH
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended September 30, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 54,351 $ 33,169 $ 35,229 $ 29,391 $ 25,110
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 34,878 22,519 22,931 20,424 17,101
Operating expenses, including merger integration
and purchased in-process research and development 27,842 14,168 13,021 11,910 10,525
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 7,036 8,351 9,910 8,514 6,576
% of sales 12.9% 25.2% 28.1% 29.0% 26.2%
Other income (expense) (1,715) (297) (199) 379 (616)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 5,321 8,054 9,711 8,893 5,960
Income taxes 2,935 3,096 3,729 3,601 2,436
- -----------------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 2,386 $ 4,958 $ 5,982 $ 5,292 $ 3,524
% of sales 4.4% 14.9% 17.0% 18.0% 14.0%
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ .16 $ .34 $ .41 $ .36 $ .28
Number of employees 324 192 178 173 156
Cash dividends declared and
paid per common share $ .20 $ .22 $ .19 $ .16 $ .10
Diluted weighted average number of
shares outstanding 14,580 14,703 14,661 14,758 14,507
Return on beginning shareholders' equity 6.9% 15.2% 20.2% 28.0% 26.6%
Net sales growth--increase/(decrease) 63.9% (5.8%) 19.9% 17.0% 14.8%
Per share earnings growth--increase/(decrease) (52.9%) (17.1%) 13.9% 28.6% 47.4%
Refer to page 26 for Ten-Year Summary
</TABLE>
[CHART]
NET SALES
(dollars in millions)
5-Year Compound
Growth Rate 20%.
The fiscal 1999 increase in net sales reflects a 7% increase in the core
business with the remaining attributable to strong performance of the Gull
products since the acquisition.
[CHART]
NET EARNINGS
(dollars in millions)
5-Year Compound
Growth Rate 20%*
Fiscal 1999 net earnings reflect the after-tax impact of one-time merger
integration costs of $2.2 million and the impact of purchased in-process
research and development of $1.5 million. Excluding these nonrecurring items, on
an after-tax basis, net earnings were $6.1 million growing at a compound annual
growth rate of 20%.
[CHART]
DILUTED EARNINGS PER SHARE
5-Year Compound Growth Rate 17%*
Fiscal 1999 diluted earnings per share reflect the after tax impact of merger
integration costs of $0.15 and the impact of purchased in-process research and
development of $0.10. Excluding these nonrecurring items, diluted earnings grew
at a compound annual growth rate of 17%.
*excluding impact of one-time charges
<PAGE> 3
Exhibit 13
Meridian Diagnostics, Inc.'s
1999 Annual Report
<PAGE> 4
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
GULL LABORATORIES INC. ACQUISITION
On November 5, 1998, the Company acquired all of the approximately eight
million shares of common stock of Gull Laboratories, Inc. (Gull) for
$19,700,000, in cash, including acquisition costs of $1,700,000. 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. Gull's HLA tissue typing
products for transplantation were sold in 1999.
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 acquisition was accounted
for as a purchase. The resulting intangibles and goodwill from this transaction,
which represent a substantial portion of the purchase price, are being amortized
over lives ranging from three to twenty years. See Note 2 of the Notes to
Consolidated Financial Statements for further information.
FISCAL 1999 COMPARED TO FISCAL 1998
Consolidated net sales increased $21,182,000, or 64%, to $54,351,000 in
fiscal 1999, principally from the impact of the continued strong performance of
the Gull products since the Gull acquisition and growth in the Meridian core
business. The increase of $21,182,000 is comprised of volume growth of
$19,362,000, or 58%, pricing of $1,846,000, or 6%, and unfavorable currency of
$26,000.
Core business product sales increased about 7% 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 in total, led by Premier Platinum HpSA(tm) (HpSA), Premier
Giardia/Cryptosporidium and the ImmunoCard STAT! line of products, contributed
approximately $3,692,000 of total net sales or $2,081,000 of incremental
revenues for the year. All other key product groups were performing ahead of the
prior year. OEM sales declined $305,000 compared to last year, reflecting the
anticipated reduction in sales of virology and mononucleosis products.
International sales in total were $18,499,000, up $9,627,000, or 109% from
$8,872,000 in fiscal 1998 and represented 34% of total sales compared to 27% in
fiscal 1998. This increase was primarily accounted for from the acquisition of
Gull.
Gross profits increased $12,359,000, or 55%, to $34,878,000 for the year
compared to the sales increase of 64%. Gross profit decreased as a percentage of
sales to 64% from 68%. 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 four points as a percent of sales. In addition, the strengthening of
the dollar versus the Deutch Mark during the third and fourth quarter in
particular, contributed to the unfavorable impact on gross margin. The Company
expects that this drag on the 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
by March 31, 2000.
Total operating expenses increased $13,674,000, or 97%, to $27,842,000 for
the fiscal year 1999 compared to fiscal 1998, and increased to 51% of sales from
43% last year, primarily due to the Gull acquisition. Research and development
costs decreased $8,000, and decreased to 4% of sales, down from 6% in the prior
year. The increase from Gull research and development expenses was largely
offset by clinical study costs associated with Premier Platinum HpSA, incurred
in fiscal 1998 that did not recur in fiscal 1999. As of March 1, 1999, all
research and development activity formerly in Salt Lake City was consolidated at
Meridian's headquarters in Cincinnati. Selling and marketing expenses increased
$3,680,000, or 49%, for fiscal 1999 primarily due to Gull, but declined
approximately 2 points from 23% of sales to 21% for fiscal 1999. General and
administrative costs increased $5,087,000, or 109%, and increased as a percent
of sales to 18% from 14% for the fiscal year. This increase is attributable to
the Gull acquisition, including $1,350,000 of amortization of Gull-related
intangibles and goodwill for the year. In connection with the Gull acquisition,
the Company incurred merger integration costs of approximately $3,415,000 during
the year. 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's sales forces, training, travel, product
validation costs and professional fees incurred in connection with the
integration of the Gull business. Additionally, the Company incurred a one-time
charge for purchased in-process research and development of $1,500,000 in
connection with the Gull acquisition.
Operating income for fiscal 1999 decreased $1,315,000, or 16%, and declined
as a percent of sales to 13% from 25%. Excluding the merger integration costs of
$3,415,000 and purchased in-process research and development of $1,500,000,
operating income increased $3,600,000, or 43%. Other expense increased
$1,418,000 for the fiscal year. This increase is primarily related to $506,000
in net interest expense for Gull-related obligations coupled with the effect of
an $835,000 reduction in interest income due to the use of cash and investments
to acquire Gull.
The Company's effective tax rate increased to approximately 55%, up from
38% for fiscal 1998. This increase is due to the effect of purchased in-process
research and development and goodwill amortization, which are not deductible for
tax purposes. These two items had the effect of increasing the effective tax
rate by approximately 10 percentage points. While the tax impact of purchased
in-process research and development is a one-time event, the
10
<PAGE> 5
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
goodwill amortization will have an ongoing effect of slightly increasing the
effective tax rate. The remaining increase of 7 percentage points is the result
of higher tax rates in certain European countries, recognition of a valuation
allowance for a portion of the losses in the foreign operations acquired from
Gull and a higher state and local effective tax rate due to an increased
presence in certain states as a result of the Gull acquisition. The Company has
developed operational and tax planning strategies designed to improve the
profitability of foreign operations acquired from Gull and to utilize
post-acquisition net operating losses. The realization of deferred tax assets in
foreign jurisdictions is dependent upon the generation of future taxable income
in certain European countries. Management has considered the levels of currently
anticipated pre-tax income in foreign jurisdictions in assessing the required
level of the deferred tax asset valuation allowance. Taking into consideration
historical pre-tax loss levels, tax planning strategies and other factors,
management believes that it is more likely than not that the net deferred tax
asset for foreign jurisdictions, after consideration of the valuation allowance
which has been established, will be realized. The amount of the net deferred tax
asset considered realizable in foreign jurisdictions, however, could be reduced
in future years if estimates of future taxable income during the carryforward
period are reduced. Tax planning strategies include restructuring European
distribution operations, closing production operations in Germany and changes in
the cost structure.
Net earnings decreased $2,572,000, or 52%, for fiscal year 1999 compared to
fiscal 1998 and decreased to 4% of sales from 15% last year. Excluding the after
tax impact of merger integration costs of $2,193,000, and the impact of
purchased in-process research and development of $1,500,000 which is not tax
deductible, net earnings increased $1,121,000, or 23%.
Diluted earnings per share, excluding the after tax impact of merger
integration costs and purchased in-process research and development, were $0.42
compared to $0.34 in the prior year, an increase of 24%. Including merger
integration costs and purchased in-process research and development, diluted
earnings per share were $0.16.
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 was 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 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 approximately 3 points to 68% in fiscal 1998 compared
to 65% for the prior year. This improvement was 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 sale to 43% from 37%.
Research and development expenses increased dramatically by $492,000 or 33% to
$1,994,000 and increased to 6% as a percent of sales, up from 4% in 1997. This
increase was largely from the HpSA multi-site clinical studies conducted during
the year, clinical studies associated with the additional claim for therapeutic
11
<PAGE> 6
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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 was
related to other administrative expenses including depreciation, computer
maintenance charges, 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 remained 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 Company's effective tax rate was 38% 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.
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 $19,700,000 in cash,
including acquisition costs. This acquisition was funded by cash and investments
on hand.
As of September 30, 1999, the Company had cash and cash equivalents of
$6,229,000, investments of $1,002,000 and working capital of $18,655,000.
Net cash flow provided by operating activities was $9,014,000 for
twelve-month period ended September 30, 1999, up $2,149,000 or 31% from the
prior year period. Despite lower net earnings, cash flow from operations
increased as a result of the $4,289,000 increase in non-cash items, including
purchased in-process research and development charges, depreciation and
amortization. The effect of other operating cash items was relatively comparable
to the prior year.
Net cash used for investing activities was $17,891,000, which was more than
accounted for by the Gull acquisition which utilized approximately $19,100,000
in cash. Capital expenditures for the twelve months ended September 30, 1999
were $2,153,000. The major expenditures included the modifications to the
Cincinnati facilities to accommodate the transfer of the Gull product line
production from Salt Lake City. The Company's anticipated total capital
expenditures for fiscal 2000 are estimated to be about $4,600,000 primarily
consisting of facility modifications, integrated computer systems implementation
and normal operating equipment additions and replacements. The Company expects
to fund these capital expenditures with a combination of cash from operating
activities, leasing arrangements and other bank financing. The sale of
investments provided $3,367,000. Net cash used for financing activities was
$4,033,000, up $721,000 or 22%, primarily due to higher debt payments
attributable to Gull.
On November 17, 1999, the Board of Directors declared the regular cash
dividend of $0.05 per share payable December 7, 1999 to shareholders of record
on November 24, 1999. The Board also announced its intention, barring unforeseen
circumstances, to increase the annual dividend rate to $0.24 per share for
fiscal 2000, an increase of 20%.
Total dividends paid during fiscal 1999, were $2,877,000 compared to
$3,127,000 paid in fiscal 1998 which included a special year end dividend.
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.
Capital expenditures related to the Gull acquisition as well as certain
costs associated with integration of the Gull operations required some interim
financing. The Company has a $20,000,000 unsecured line of credit with a
commercial bank under which $3,354,000 was used at September 30, 1999. The
Company also has cash and cash equivalents and investments of approximately
$7,231,000 at September 30, 1999. The line, which expires on July 1, 2000, is
expected to be renewed.
MARKET RISK EXPOSURE
Information concerning the maturities and fair value of the Company's
interest-rate-sensitive investments and debt is included in Notes 3 and 6 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 it established its investment policy. The Company
also monitors the investment advisor's compliance with the established
investment policy.
The Company's exposure to interest risk is minimal due to the relatively
small amount of investments and variable rate debt. The Company is exposed to
currency rate fluctuations as a result of its distribution operations in
12
<PAGE> 7
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Europe. To date, exchange rate gains and losses have been immaterial and no
hedging activities have been employed.
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 was 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, have been 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 identified and
assessed the compliance of other critical IT and non-IT systems and has
completed remediation plans on the critical systems. Remediation efforts include
modifications or replacement of software and certain hardware.
Costs specifically associated with the Company's Year 2000 efforts have
consisted primarily of systems software and hardware replacements and upgrades,
and non-IT systems replacements and upgrades. The total of such costs is
approximately $400,000, which consists primarily of costs to implement the
Company's primary business system in Germany.
The Company has evaluated the status of significant customers and suppliers
to determine the extent to which it is vulnerable to these third parties. The
Company believes its broad customer base and availability of alternate suppliers
will mitigate any risks associated with these third parties. The Company has
also developed a contingency plan in the event normal operations are impacted by
the Year 2000. The contingency plan includes reverting to manual systems and
other manual work-arounds.
The Company believes that the Year 2000 issue will not pose significant
operational problems. However, if a major third party fails to properly
remediate its Year 2000 issues, 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's systems are being updated to process Euro transactions. The
Company does not currently believe the conversion to the Euro will have a
material impact on the business and operations; however, there can be no
assurances.
RECENTLY RELEASED ACCOUNTING PRONOUNCEMENTS
In 2001, the Company will be required to adopt the provisions of Statement
of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This accounting pronouncement is not
expected to have any impact on the Company's financial position or operating
results as the Company does not utilize derivative instruments.
13
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Meridian Diagnostics, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------
As of September 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
ACURRENT ASSETS:
Cash and cash equivalents (Note 3) $ 6,229 $ 19,400
Investments (Notes 1 and 3) 1,002 4,369
Accounts receivable, less allowance of $380 in 1999 and $171 in 1998 for doubtful accounts 12,932 9,707
Inventories (Notes 1 and 4) 10,357 5,569
Prepaid expenses and other 890 379
Deferred tax assets (Note 7) 562 339
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 31,972 39,763
- ------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT (NOTE 1):
Land 969 332
Buildings and improvements 10,427 7,095
Machinery, equipment and furniture 11,986 8,524
Construction in progress 811 171
- ------------------------------------------------------------------------------------------------------------------------
24,193 16,122
Less-accumulated depreciation and amortization 9,987 7,313
- ------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 14,206 8,809
- ------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS (NOTES 1 AND 2):
Long-term receivables and other 940 1,035
Deferred tax assets (Note 7) -- 740
Deferred debenture offering costs, net of accumulated amortization
of $407 in 1999 and $272 in 1998 922 1,057
Other intangible assets, net of accumulated amortization of $9,258 in 1999
and $6,730 in 1998 (Note 5) 20,760 6,537
Cost in excess of net assets acquired, net of accumulated amortization
of $806 in 1999 and $539 in 1998 3,589 1,206
- ------------------------------------------------------------------------------------------------------------------------
Total other assets 26,211 10,575
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 72,389 $ 59,147
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
ACURRENT LIABILITIES:
Current portion of long-term and capital lease obligations (Note 6) $ 821 $ 213
Notes payable to bank (Note 6) 3,354 --
Note payable to third party (Note 2) 1,000 --
Accounts payable 3,495 1,050
Accrued payroll and payroll taxes 2,154 853
Accrued expenses 2,693 1,753
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 13,517 3,869
- ------------------------------------------------------------------------------------------------------------------------
LONG-TERM AND CAPITAL LEASE OBLIGATIONS (NOTE 6) 21,366 20,595
- ------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 6) -- --
- ------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES (NOTE 7) 3,602 --
- ------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (NOTE 8):
Preferred stock, no par value, 1,000,000 shares authorized; none issued -- --
Common stock, no par value, 50,000,000 shares authorized; 14,429,151 and 14,382,613
shares issued and outstanding at September 30, 1999 and 1998 respectively, stated at 2,424 2,397
Additional paid-in capital 20,855 20,653
Retained earnings 11,444 11,935
Accumulated other comprehensive loss (819) (302)
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 33,904 34,683
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 72,389 $ 59,147
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
14
<PAGE> 9
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands except per share data, shares in thousands)
<TABLE>
<CAPTION>
Meridian Diagnostics, Inc. and Subsidiaries
- -----------------------------------------------------------------------------------------------------
For the Years Ended September 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 54,351 $ 33,169 $ 35,229
COST OF SALES 19,473 10,650 12,298
- -----------------------------------------------------------------------------------------------------
Gross profit 34,878 22,519 22,931
- -----------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 1,986 1,994 1,502
Selling and marketing 11,172 7,492 7,223
General and administrative 9,769 4,682 4,296
Merger integration (Note 2) 3,415 -- --
Purchased in-process research and development (Note 2) 1,500 -- --
- -----------------------------------------------------------------------------------------------------
Total operating expenses 27,842 14,168 13,021
- -----------------------------------------------------------------------------------------------------
Operating income 7,036 8,351 9,910
OTHER INCOME (EXPENSE):
Interest income 505 1,340 1,037
Interest expense (2,143) (1,624) (1,196)
Other, net (77) (13) (40)
- -----------------------------------------------------------------------------------------------------
Total other income (expense) (1,715) (297) (199)
- -----------------------------------------------------------------------------------------------------
Earnings before income taxes 5,321 8,054 9,711
INCOME TAXES (NOTE 7) 2,935 3,096 3,729
- -----------------------------------------------------------------------------------------------------
Net earnings $ 2,386 $ 4,958 $ 5,982
- -----------------------------------------------------------------------------------------------------
BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,385 14,376 14,342
- -----------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $ .17 $ .34 $ .42
- -----------------------------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,580 14,703 14,661
- -----------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ .16 $ .34 $ .41
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
15
<PAGE> 10
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data, shares in thousands)
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Common Accumulated
Shares Additional Other
Issued and Comprehensive Common Paid-In Retained Comprehensive
Outstanding Income Stock Capital Earnings Income (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996 14,279 -- $ 2,386 $ 20,526 $ 6,810 $ (154) $ 29,568
Cash dividends paid--
$.19 per share -- -- -- (2,688) -- (2,688)
Exercise of stock options, net 86 -- 8 45 -- -- 53
Comprehensive income:
Net earnings -- $ 5,982 -- -- 5,982 -- 5,982
Other comprehensive
income (loss):
Foreign currency translation
adjustment -- (276) -- -- -- (276) (276)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- 5,706 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 14,365 -- 2,394 20,571 10,104 (430) 32,639
Cash dividends paid--
$.22 per share -- -- -- (3,127) -- (3,127)
Exercise of stock options, net 18 -- 3 82 -- -- 85
Comprehensive income:
Net earnings -- 4,958 -- -- 4,958 -- 4,958
Other comprehensive
income (loss):
Foreign currency translation
adjustment -- 128 -- -- -- 128 128
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- 5,086 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998 14,383 -- 2,397 20,653 11,935 (302) 34,683
Cash dividends paid--
$.20 per share -- -- -- -- (2,877) -- (2,877)
Exercise of stock options, net 46 -- 27 202 -- -- 229
Comprehensive income:
Net earnings -- 2,386 -- -- 2,386 -- 2,386
Other comprehensive
income (loss):
Foreign currency translation
adjustment -- (517) -- -- -- (517) (517)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- $ 1,869 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999 14,429 -- $ 2,424 $ 20,855 $ 11,444 $ (819) $ 33,904
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
16
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,386 $ 4,958 $ 5,982
Non-cash items--
Purchased in-process research and development 1,500 -- --
Depreciation of property, plant and equipment 2,674 1,370 1,240
Amortization of other intangible assets, goodwill and
deferred debentures offering costs 2,999 1,514 1,777
Deferred income taxes, net of the impact of acquisitions (953) (51) (516)
Changes in current assets excluding cash/cash equivalents and investments,
net of the impact of acquisitions 559 259 (2,075)
Changes in current liabilities excluding current portion
of long-term obligations, net of the impact of acquisitions (676) (626) (230)
Long-term receivable and payable, net of the impact of acquisitions 525 (559) 275
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,014 6,865 6,453
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Gull Laboratories, Inc., net of cash acquired (19,084) -- --
Property, plant, and equipment acquired, net (2,153) (1,321) (1,579)
Sale of short-term investments 3,367 6,844 2,881
Purchase of product license -- (200) --
Patents -- -- (45)
Advance royalties paid (21) (25) --
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (17,891) 5,298 1,257
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Subordinated debentures, offering costs -- -- (66)
Proceeds from other long-term obligations 3,354 -- 60
Repayment of long-term obligations (4,739) (270) (161)
Dividends paid (2,877) (3,127) (2,688)
Proceeds from issuance of common stock 229 85 53
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used for) financing activities (4,033) (3,312) (2,802)
- ----------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (261) 26 (33)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,171) 8,877 4,875
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,400 10,523 5,648
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,229 $ 19,400 $ 10,523
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Income taxes $ 4,583 $ 3,982 $ 3,035
Interest 1,805 1,469 1,459
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
17
<PAGE> 12
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. Meridian Diagnostics International, Inc. and Gull Laboratories, Inc. and
its subsidiaries: BIODESIGN International, Gull Laboratories GmbH, Gull Europe
S.A., Gull Belgium S.A., and Gull Netherlands N.V. (collectively, "Meridian" or
the "Company"). All significant intercompany accounts and transactions have been
eliminated.
(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, 1999 or 1998.
(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) OTHER ASSETS--Other 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--3 to 10 years
Core products--15 years
Manufacturing processes--15 years
Contracts--15 years
Customer lists--15 years
Workforce--5 years
License agreements--3 to 13 years
Patents, tradenames and distributorships--1 to 15 years
Cost in excess of net assets acquired is being amortized on a straight-line
basis over 15 to 20 years. Deferred debenture offering costs are being amortized
on a straight-line basis over 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 cash flows over the remaining life of the asset in measuring
whether the asset is recoverable. For the three years ended September 30, 1999,
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--Basic earnings per share is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding. Diluted earnings per share 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 of dilutive potential common stock on income and the weighted average
number of shares for the three years ended September 30, 1999. (Amounts in
thousands except per share data)
<TABLE>
<CAPTION>
Year Ended
- -----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1999 September 30,1998 September 30,1997
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
shareholders $2,386 14,385 $ .17 $4,958 14,376 $ .34 $5,982 14,342 $ .42
- -----------------------------------------------------------------------------------------------------------------------------------
Effect Of Dilutive
Securities Stock Options -- 195 -- -- 327 -- -- 319 --
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
Net income available
to common shareholders
and assumed
conversions $2,386 14,580 $ .16 $4,958 14,703 $ .34 $5,982 14,661 $ .41
- -----------------------------------------------------------------------------------------------------------------------------------
Antidilutive Securities
Excluded from Earnings
Per Share Calculation:
Options 265 282 986
Convertible Debentures 1,243 1,243 1,243
- -----------------------------------------------------------------------------------------------------------------------------------
During 1999, 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.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 13
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 1999, 1998 and 1997 were approximately $327,000,
$205,000, and $119,000 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,
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 with gains or losses
resulting from translation included in a separate component of accumulated other
comprehensive income (loss). Revenues and expenses are translated using exchange
rates prevailing during the year. Gains and losses resulting from transactions
in foreign currencies were immaterial.
(m) RECLASSIFICATIONS--Certain reclassifications have been made to 1998 and 1997
amounts to conform with the 1999 presentation.
(2) GULL LABORATORIES, INC. ACQUISITION
On November 5, 1998, the Company acquired all of the common stock of Gull
Laboratories, Inc. (Gull) for $19,700,000, in cash including acquisition costs
of $1,700,000. 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. Gull's products related to HLA tissue typing for transplantation
were sold. The acquisition was accounted for as a purchase. 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 following unaudited pro forma combined results of operations for the two
years ended September 30, 1999, assume the Gull acquisition occurred as of
October 1, 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 of intangible
assets and goodwill, purchased in-process research and development costs and
adjustments to the tax provision assuming 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.
- -------------------------------------------------------------
Year Ended September 30, 1999 1998
- -------------------------------------------------------------
Net sales $ 55,841 $ 53,535
Net earnings (loss) $ 3,959 $ (1,613)
Earnings (loss) per share:
Basic $ 0.28 $ (0.11)
Diluted $ 0.27 $ (0.11)
In connection with the acquisition of Gull, assets were acquired and
liabilities were assumed as follows, (dollars in thousands):
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
Cash and cash equivalents $ 640
Accounts and notes receivable 3,030
Inventories 5,615
Other current assets 640
Property, plant and equipment 5,915
Intangibles 16,500
Other non-current assets 785
Goodwill 2,610
Purchased in-process research and development 1,500
- ------------------------------------------------------------
37,235
- ------------------------------------------------------------
Less: Cash paid for net assets, including
acquisition costs 19,725
- ------------------------------------------------------------
$17,510
- ------------------------------------------------------------
LIABILITIES ASSUMED INCLUDING:
- ------------------------------------------------------------
Liabilities and debt $11,065
Additional purchase liabilities 1,420
Deferred tax liabilities, net 5,025
- ------------------------------------------------------------
$17,510
- ------------------------------------------------------------
The estimated fair market value of intangibles acquired was based on
projected discounted cash flows or the cost basis. The estimated fair market
values and lives of the intangibles are as follows:
- ------------------------------------------------------------
($ in thousands) Value Life
- ------------------------------------------------------------
Manufacturing processes $ 6,400 15
Core products 5,300 15
Customer lists 2,400 15
Contracts 900 15
Covenants not to compete 800 3
Workforce 500 5
Trademarks 200 15
- ------------------------------------------------------------
$16,500
- ------------------------------------------------------------
19
<PAGE> 14
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
In fiscal 2000, the Company plans to close the Salt Lake City production
facilities, sell the Gull land and buildings in Salt Lake City, and transfer
equipment, technology and manufacturing capabilities to the Company's
headquarters in Cincinnati. The facility in Salt Lake City is currently being
marketed for sale. Additional purchase liabilities recorded include
approximately $1,400,000 for severance and costs related to the shut down and
consolidation of the acquired facilities in Salt Lake City and Germany.
Approximately half of this amount has been paid as of September 30,1999. In
connection with the acquisition, the Company agreed to pay certain amounts owed
by Gull to its former parent company. At September 30, 1999, $1,000,000 was
recorded as a note payable to third party representing the final amount payable
to the former parent. This note was paid on November 16,1999.
To date, Gull research and development activities have been consolidated
into Meridian's Cincinnati operations and production facilities in Germany have
been shut down. The renovation of the Cincinnati facilities is scheduled to be
completed by December 31, 1999 to accommodate the manufacture of Gull products
although certain Gull products are already being produced in Cincinnati.
The major components of the merger integration costs incurred during fiscal
1999 are as follows:
- --------------------------------------------------------------
($ in thousands) Amount
- --------------------------------------------------------------
Product validation costs (materials and labor) $ 1,175
Travel and training 590
Professional fees primarily related to reorganization
of European operations 410
Termination payments to distributors 440
Other 800
- --------------------------------------------------------------
Total merger integration costs $ 3,415
- --------------------------------------------------------------
Substantially all merger integration costs have been paid as of September
30, 1999. The Company expects fiscal year 2000 merger integration costs to be
immaterial.
(3) CASH AND CASH EQUIVALENTS, AND INVESTMENTS
Cash and cash equivalents have original maturities of less than three
months and consist of cash and money market accounts.
Investments are comprised of the following: (amounts in thousands)
- --------------------------------------------------------------
September 30, 1999 1998
- --------------------------------------------------------------
U.S. government direct and
indirect obligations $ -- $ 998
Mortgage-backed securities 998 3,366
Common stock 4 5
$1,002 $4,369
- --------------------------------------------------------------
At September 30, 1999 and 1998, the market value of the Company's
investments approximated cost. Mortgage-backed securities, which consist of
Federal Home Loan Bank and Mortgage Corporation securities, mature between
December 2000 and February 2001 and have interest rates ranging from 4.9% to
5.0% at September 30,1999.
(4) INVENTORIES
Inventories are comprised of the following: (amounts in thousands)
- --------------------------------------------------------------
September 30, 1999 1998
- --------------------------------------------------------------
Raw materials $ 2,469 $1,480
Work-in-process 3,211 1,714
Finished goods 4,677 2,375
- --------------------------------------------------------------
$10,357 $5,569
- --------------------------------------------------------------
(5) OTHER INTANGIBLE ASSETS
Other intangible assets are comprised of the following: (amounts in
thousands)
- --------------------------------------------------------------
September 30, 1999 1998
- --------------------------------------------------------------
Covenants not to compete $ 6,321 $ 5,521
Core products 5,300 --
Manufacturing processes 8,641 2,241
Trademarks, licenses, patents, 3,188 2,737
Customer lists 5,168 2,768
Workforce 500 --
Contracts 900 --
- --------------------------------------------------------------
30,018 13,267
Less accumulated amortization (9,258) (6,730)
- --------------------------------------------------------------
$20,760 $ 6,537
- --------------------------------------------------------------
(6) BANK CREDIT ARRANGEMENTS, LONG-TERM AND CAPITAL LEASE OBLIGATIONS,
COMMITMENTS AND CONTINGENCIES
(a) BANK CREDIT ARRANGEMENTS--As part of a bank credit arrangement the Company
has a $20,000,000 unsecured line of credit which expires on July 1, 2000 and
calls for interest at prime floating less 1/2% or the LIBOR rate plus 2.25%.
Borrowings of $3,354,000 were outstanding on the line of credit at September 30,
1999 at a weighted average interest rate of 7%. In connection with the bank
credit arrangement, the Company has agreed, among other things, to limit
additional indebtedness. The Company has complied with all debt covenants and
requirements.
(b) LONG-TERM OBLIGATIONS--Long-term obligations are comprised of the following
at: (amounts in thousands)
- --------------------------------------------------------------
September 30, 1999 1998
- --------------------------------------------------------------
Convertible Subordinated
Debentures, unsecured,
7% annual interest payable
semi-annually on March 1
and September 1, principal
due September 1, 2006 $20,000 $20,000
Other 333 34
- --------------------------------------------------------------
20,333 20,034
Less current portion -- --
- --------------------------------------------------------------
$20,333 $20,034
- --------------------------------------------------------------
20
<PAGE> 15
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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. These debentures were issued at par and do not
have a discount feature. The fair market value of the Company's debt is
approximately $15,700,000 based on limited trading of the debentures. Maturities
on the above long-term obligations are all after 2001.
(c) CAPITAL LEASE OBLIGATIONS--At September 30, 1999, the Company has equipment
with cost and related accumulated depreciation of $4,446,000 and $3,491,000
respectively, under capital leases expiring in various years through 2005.
Amortization of assets under capital leases is included in depreciation expense.
The future minimum annual rentals under the capital leases at September 30,
1999 are as follows: (amounts in thousands)
- --------------------------------------------------------------
2000 $ 964
2001 695
2002 288
2004 70
Thereafter 51
- --------------------------------------------------------------
Subtotal $2,068
Less: portion of payments representing interest 214
- --------------------------------------------------------------
Present value of lease payments $1,854
Less: current portion 821
- --------------------------------------------------------------
$1,033
- --------------------------------------------------------------
(d) 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 $907,000, $859,000, and,
$1,006,000 respectively, for the years ended September 30, 1999, 1998 and 1997.
The Company also has capital expenditure commitments of approximately
$2,700,000 related to the completion of the renovation of its Cincinnati
production facilities to handle the Gull production. Rent expense was $170,000,
in fiscal 1999. The Company had no rent expense in fiscal 1998 and 1997. Future
commitments for operating leases are not material.
(e) CONTINGENCIES--The Company is party to litigation that it believes is in the
normal course of business. The ultimate resolution of these matters is not
expected to have a materially adverse effect on the Company's financial
position, results of operations or cash flows.
(7) INCOME TAXES
The provision for income taxes includes the following components: (amounts
in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Years Ended September 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Currently payable $ 2,640 $ 2,497 $ 2,912
Temporary differences--
Tax depreciation greater (less) than book depreciation (98) (54) (60)
State franchise taxes 71 (6) (54)
Currently nondeductible expenses 323 (14) (21)
Intangible asset amortization (534) (125) (94)
Utilization of net operating loss carryforwards 226 -- --
Other, net (87) 42 24
- ------------------------------------------------------------------------------------------------
2,541 2,340 2,707
- ------------------------------------------------------------------------------------------------
State and local 531 445 577
Foreign (137) 311 445
- ------------------------------------------------------------------------------------------------
Total provision for income taxes $ 2,935 $ 3,096 $ 3,729
- ------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 16
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following is a reconciliation between the statutory US income tax rate
and the effective rate derived by dividing the provision for income taxes by
earnings before income taxes. The US and foreign components of earnings before
income taxes in fiscal 1999 were income of $6,600,000 and a loss of $1,300,000
respectively. The foreign components of earnings before income taxes in fiscal
1998 and 1997 were immaterial. (amounts in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
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 $ 1,809 34.0% $ 2,738 34.0% $ 3,302 34.0%
Increase/(decrease) in taxes resulting from:
Goodwill amortization 38 0.7 -- -- -- --
Purchased in-process research and development 510 9.6 -- -- -- --
State and local income taxes,
net of federal income tax effect 350 6.6 293 3.6 385 4.0
Foreign taxes 313 5.9 81 1.0 191 2.0
Foreign Sales Corporation benefit (135) (2.5) (92) (1.1) (121) (1.3)
Other, net 50 0.9 76 0.9 (28) (0.3)
- ---------------------------------------------------------------------------------------------------------------------
Actual provision for income taxes $ 2,935 55.2% $ 3,096 38.4% $ 3,729 38.4%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of net deferred tax assets (liabilities) were as follows at:
(amounts in thousands)
- -------------------------------------------------------------------------
Years Ended September 30, 1999 1998
- -------------------------------------------------------------------------
Deferred tax assets:
Nondeductible expenses $ 673 $ 281
Intangible asset amortization -- 744
Valuation reserves 191 --
Net operating loss carryforwards
in foreign jurisdictions 5,381 --
Other 25 218
- -------------------------------------------------------------------------
Total deferred tax assets: 6,270 1,243
Valuation allowance (3,491) --
- -------------------------------------------------------------------------
2,779 1,243
Deferred tax liabilities:
Fixed asset depreciation (684) --
Intangible asset amortization (4,881) --
Other (254) (164)
- -------------------------------------------------------------------------
Total deferred tax liabilities: (5,819) (164)
Net deferred tax asset (liability) $(3,040) $ 1,079
- -------------------------------------------------------------------------
For income tax purposes, the Company has tax benefits related to operating
loss carryforwards of $2,156,000, $508,000, $34,000 and $2,683,000 in Belgium,
France, the Netherlands and Germany, respectively. The operating loss
carryforward in France expires between 2000 and 2004. The operating loss
carryforwards in Belgium and Germany have no expiration. The Company has
recorded deferred tax assets for these carryforwards, inclusive of a valuation
allowance in the amount of $3,491,000 at September 30, 1999. Valuation
allowances for preacquisition net operating loss carryforwards amount to
$2,788,000, while valuation allowances for post acquisition net operating loss
carryforwards are $703,000. If tax benefits are recognized in future years for
preacquisition operating losses, such benefits will be allocated to reduce
goodwill and acquired intangible assets. No valuation allowance was recorded
against deferred tax assets at September 30, 1998.
The realization of deferred tax assets in foreign jurisdictions is
dependent upon the generation of future taxable income in certain European
countries. Management has considered the levels of currently anticipated pre-tax
income in foreign jurisdictions in assessing the required level of the deferred
tax asset valuation allowance. Taking into consideration historical pre-tax loss
levels, tax planning strategies and other factors, management believes that it
is more likely than not that the net deferred tax asset for foreign
jurisdictions, after consideration of the valuation allowance which has been
established, will be realized. The amount of the net deferred tax asset
considered realizable in foreign jurisdictions, however, could be reduced in
future years if estimates of future taxable income during the carryforward
period are reduced. Tax planning strategies include restructuring European
distribution operations and closing production operations in Germany and changes
in cost structure.
(8) 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 $386,000, $311,000, and $291,000,
during fiscal 1999, 1998 and 1997, respectively.
(b) STOCK-BASED COMPENSATION PLANS--The Company has three expired stock option
plans, the 1986 Stock Option Plan, the 1990 Directors' Stock Option Plan and the
1994 Directors' Stock Option Plan collectively ("The Expired Plans"), and three
active plans, the 1996 Stock Option Plan Amended and Restated effective January
22, 1999 ("The 1996 Plan"), the
22
<PAGE> 17
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
1999 Directors' Stock Option Plan ("The 1999 Plan") and the 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: (amounts in thousands, except per share data)
- --------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------
Net Income:
As Reported $ 2,386 $ 4,958 $ 5,982
Pro Forma 2,075 4,817 5,886
Basic EPS:
As Reported $ .17 $ .34 $ .42
Pro Forma $ .14 .34 .41
Diluted EPS:
As Reported $ .16 .34 .41
Pro Forma $ .14 .33 .40
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. On a cummulative
basis 5,285 and 2,935 shares were sold under the ESP Plan as of September 30,
1999 and 1998, respectively.
The Company may grant options for up to 700,000 shares under the 1996 Plan
and 50,000 shares under the 1999 Plan. The Company has granted options of
1,020,612 shares under the Expired Plans compared to 1,441,235 shares authorized
for option grants, and has granted 355,417 options under the 1996 Plan through
September 30, 1999. No options have been granted under the 1999 Plan. Options
may be granted at exercise prices varying from 95% to 110% of the market value
of the underlying common stock on the date of grant and become exercisable on
vesting schedules established at the time of grant. All options contain
provisions restricting their transferability and limiting their exercise in the
event of termination of employment or the disability or death of the optionee.
Options may be granted both as incentive stock options designed to provide
certain tax benefits under the Internal Revenue Code and as nonqualified options
without such tax benefits.
A summary of the status of the Company's stock option plans at September
30, 1999, 1998 and 1997 and changes during the years then ended is presented in
the tables and narrative below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
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 838,615 $ 6.84 717,388 $ 5.77 810,594 $ 5.21
Granted 140,368 6.67 164,918 11.54 40,301 12.80
Exercised* (58,864) 5.68 (37,712) 6.49 (120,621) 4.26
Expired (83,345) 7.34 (5,979) 10.83 (12,886) 6.81
Outstanding at end of period 836,774 6.84 838,615 6.84 717,388 5.77
Exercisable at end of period 547,520 5.42 571,112 4.89 498,499 4.56
Wtd avg fair value of options granted $ 3.89 $ 5.76 $ 5.92
</TABLE>
*Includes 13,026, 20,658, and 34,320 shares surrendered in conjunction with the
exercise of stock options in 1999, 1998 and 1997 respectively.
The range of exercise prices, the weighted average exercise price and the
weighted average remaining contractual life is summarized below for options
which are outstanding and those that are exercisable.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Options Outstanding Exercisable
------------------------------------------------ -----------------------------------
Number Weighted Average Weighted Number Weighted
Outstanding Remaining Average Outstanding Average
Range of Exercise Prices at 9/30/99 Contractual Life Exercise Price at 9/30/99 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00--5.00 193,489 1.4 years $ 1.60 193,489 $ 1.60
$5.01--10.00 435,047 5.9 years $ 6.50 286,083 $ 6.27
$10.01--16.00 208,238 7.4 years $ 12.39 67,948 $ 12.72
- -----------------------------------------------------------------------------------------------------------------------
Total 836,774 5.2 years $ 6.84 547,520 $ 5.42
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 18
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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:
- ---------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------
Risk-free interest rates 4.7% - 6.2% 5.7% - 6.2%
Dividend yield 1.8% 1.7%
Life of option 3-8 YEARS 3-8 years
Share price volatility 52% 46.5%
Subsequent to year-end, 134,900 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 post-retirement or
post-employment benefits to its employees.
(9) MAJOR CUSTOMERS AND SEGMENT DATA
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.
Consolidated sales in thousands of dollars to individual customers
constituting 10% or more of net sales were as follows:
- ----------------------------------------------------------------
Years Ended September 30,
($ in thousands) 1999 1998 1997
- ----------------------------------------------------------------
Customer A $6,849 (13%) $4,512 (14%) $6,533 (19%)
Customer B 6,780 (12%) $5,839 (18%) $4,991 (14%)
Meridian operates in two geographic segments, Meridian Diagnostics, Inc.
(MDI) and Meridian Diagnostics Europe (MDE). MDI operations consist of the
manufacture and sale of diagnostic test kits in the U.S. and countries outside
of Europe, Africa and the Middle East. It also includes sales of bioresearch
reagents and sales of proficiency tests, which combined, represent approximately
10% of total Company revenues. MDI export sales were as follows:
($ in thousands) 1999 1998 1997
- ---------------------------------------------------------------
Net sales $4,059 $3,614 $4,515
MDE distributes diagnostic test kits in Europe, Africa and the Middle East.
Accounts receivable which are largely dependent upon funds from the Italian
government represent approximately 20% of the accounts receivable balance at
September 30, 1999. Significant country information for MDE is as follows:
($ in thousands) 1999 1998 1997
- --------------------------------------------------------------
Italy
Sales $6,013 $5,267 $5,766
Identifiable Assets 5,872 5,560 5,123
Germany
Sales 9,310 -- --
Identifiable Assets $6,406 -- --
Sales are attributed to the geographic area based on the location from
which the product is shipped to the customer.
Segment information for the years ended September 30, 1999, 1998, and 1997
is as follows:
- ------------------------------------------------------------------------------
($ in thousands) MDI MDE ELIM(1) TOTAL
- ------------------------------------------------------------------------------
1999
Net sales $ 45,106 $ 15,323 $ (6,078) $ 54,351
Depreciation 2,139 535 -- 2,674
Amortization 2,999 -- -- 2,999
Interest expense 1,920 453 (230) 2,143
Interest income 680 55 (230) 505
Merger integration costs 3,108 307 -- 3,415
In-process research
and development 1,500 -- -- 1,500
Income tax provision/
(benefit) 3,095 (137) (23) 2,935
Net income (loss) 3,607 (1,188) (33) 2,386
Total assets 97,743 12,867 (38,221) 72,389
Capital expenditures $ 2,003 $ 150 $ -- $ 2,153
1998
Net sales $ 30,208 $ 5,267 $ (2,306) $ 33,169
Depreciation 1,256 114 -- 1,370
Amortization 1,514 -- -- 1,514
Interest expense 1,615 192 (183) 1,624
Interest income 1,494 29 (183) 1,340
Income tax provision 2,803 311 (18) 3,096
Net income 4,546 365 47 4,958
Total assets 56,155 5,560 (2,568) 59,147
Capital expenditures $ 1,203 $ 118 $ -- 1,321
1997
Net sales $ 32,073 $ 5,766 $ (2,610) $ 35,229
Depreciation 1,127 113 -- 1,240
Amortization 1,777 -- -- 1,777
Interest expense 1,178 200 (182) 1,196
Interest income 1,196 23 (182) 1,037
Income tax provision 3,319 421 (11) 3,729
Net income 5,636 314 32 5,982
Total assets 55,150 5,123 (2,783) 57,490
Capital expenditures $ 1,461 $ 118 $ -- $ 1,579
(1) Eliminations consist of intersegment transactions.
The account policies of the segments are the same as those described in the
summary of significant accounting policies in Note 1. Transactions between
geographic segments are accounted for as intercompany sales at established
intercompany prices for internal and management purposes with all intercompany
amounts eliminated in consolidation. The MDI segment data for total assets
includes corporate goodwill and intangibles of $24,349,000, $7,743,000, and
$10,061,000 for the years ended September 30,1999, 1998 and 1997 respectively.
24
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of MERIDIAN
DIAGNOSTICS, INC. and subsidiaries as of September 30, 1999 and 1998, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the three years in the period ended September 30, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
November 16, 1999
QUARTERLY FINANCIAL DATA
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited (Amounts in thousands, except for per share data)
- -----------------------------------------------------------------------------------------
FOR THE QUARTER ENDED IN FISCAL 1999 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 11,720 $ 14,653 $ 13,825 $ 14,153
GROSS PROFIT 7,632 9,076 9,165 9,005
NET EARNINGS 553 1,257 1,345 (769)
DILUTED EARNINGS PER COMMON SHARE(1) .04 .09 .09 (.05)
CASH DIVIDENDS PER COMMON SHARE(1) .05 .05 .05 .05
- -----------------------------------------------------------------------------------------
For the Quarter Ended in Fiscal 1998 December 31 March 31 June 30 September 30
- -----------------------------------------------------------------------------------------
Net sales $ 8,448 $ 9,542 $ 8,226 $ 6,953
Gross profit 5,523 6,426 5,860 4,710
Net earnings 972 1,703 1,429 854
Diluted earnings per common share(1) .07 .12 .10 .06
Cash dividends per common share(1,2) .07 .05 .05 .05
</TABLE>
(1) The sum of the basic diluted 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 1997 year-end cash dividend of $0.025 per share
25
<PAGE> 20
TEN-YEAR SUMMARY
(Dollars in thousands except per share data and number of employees)
Meridian Diagnostics, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Selected Financial And Operating Data For the Years Ended September 30,
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Net Sales $ 54,351 $ 33,169 $ 35,229 $ 29,391 $ 25,110 $ 21,877 $ 16,171 $ 14,003 $ 11,085 $ 8,478
Cost of Sales 19,473 10,650 12,298 8,967 8,009 7,518 5,098 4,582 3,973 3,467
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Margin 34,878 22,519 22,931 20,424 17,101 14,359 11,073 9,421 7,112 5,011
Percent of Sales 64.17% 67.89% 65.09% 69.49% 68.10% 65.64% 68.47% 67.28% 64.16% 59.11%
Operating Expenses
Research & Development 1,986 1,994 1,502 1,499 1,432 1,433 1,165 1,157 1,102 908
Sales & Marketing 11,172 7,492 7,223 5,991 5,229 4,747 3,716 3,166 2,564 1,649
General & Administrative 9,769 4,682 4,296 4,420 3,864 3,365 2,667 2,482 2,090 1,637
Merger Integration 3,415 -- -- -- -- -- -- -- -- --
Purchased research and
development 1,500 -- -- -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Operating
Expenses 27,842 14,168 13,021 11,910 10,525 9,545 7,548 6,805 5,756 4,194
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Income 7,036 8,351 9,910 8,514 6,576 4,814 3,525 2,616 1,356 817
Percent of Sales 12.95% 25.18% 28.13% 28.97% 26.19% 22.00% 21.80% 18.68% 12.23% 9.64%
Other Income
Licensing & Related Fees -- -- 14 45 103 -- 55 55 55 55
Interest Income 505 1,340 1,037 379 436 254 57 50 144 210
Interest Expense (2,143) (1,624) (1,196) (390) (1,135) (1,092) (179) (89) (10) (15)
Cost of Withdrawn
Stock Offering -- -- -- -- -- -- (405) -- -- --
Other, Net (77) (13) (54) 345 (20) 8 48 (27) (21) 16
- ----------------------------------------------------------------------------------------------------------------------------------
Total Other
Income (Expense) (1,715) (297) (199) 379 (616) (830) (424) (11) 168 266
- ----------------------------------------------------------------------------------------------------------------------------------
Minority Interest in
Earnings of Subsidiary -- -- -- -- -- -- (7) (7)
Earnings Before
Income Taxes 5,321 8,054 9,711 8,893 5,960 3,984 3,101 2,605 1,517 1,076
Income Taxes 2,935 3,096 3,729 3,601 2,436 1,543 1,212 952 559 391
- ----------------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 2,386 $ 4,958 $ 5,982 $ 5,292 $ 3,524 $ 2,441 $ 1,889 $ 1,653 $ 958 $ 685
- ----------------------------------------------------------------------------------------------------------------------------------
Percent of Sales 4.39% 14.95% 16.98% 18.01% 14.03% 11.16% 11.68% 11.80% 8.64% 8.08%
Cash Dividends
Declared & Paid per
Common Share* $ 0.20 $ 0.22 $ 0.19 $ 0.16 $ 0.10 $ 0.08 $ 0.06 $ 0.05 $ 0.05 --
Basic Weighted
Average Number of
Common Shares
Outstanding* 14,385 14,376 14,342 14,172 12,355 12,277 12,264 11,866 11,775 11,680
Basic Earnings Per
Common Share* $ 0.17 $ 0.34 $ 0.42 $ 0.37 $ 0.29 $ 0.20 $ 0.15 $ 0.14 $ 0.08 $ 0.06
Diluted Weighted
Average Number of
Common Shares
Outstanding* 14,580 14,703 14,661 14,758 14,507 12,521 12,534 12,141 11,965 11,680
Diluted Earnings
Per Common Share* $ 0.16 $ 0.34 $ 0.41 $ 0.36 $ 0.28 $ 0.19 $ 0.15 $ 0.14 $ 0.08 $ 0.06
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 72,389 $ 59,147 $ 57,491 $ 54,751 $ 34,569 $ 32,329 $ 26,247 $ 14,099 $ 10,997 $ 10,555
Cash Marketable
Securities & Investments 7,231 23,769 21,736 19,743 8,919 8,832 9,476 1,810 1,590 2,704
Capital Expenditures 2,153 1,321 1,579 1,245 2,472 1,426 718 1,999 934 165
Net Working Capital 18,455 35,895 33,570 29,332 15,670 13,000 13,759 5,164 4,046 4,452
Shareholders' Equity 33,904 34,683 32,639 29,568 18,878 13,232 11,617 10,676 9,519 8,998
Return on Beginning
Shareholders' Equity 6.88% 15.19% 20.23% 28.03% 26.63% 21.01% 17.69% 17.37% 10.65% 8.24%
Year-End Stock Price 8.00 7.63 11.88 13.38 8.08 5.18 5.50 6.13 2.49 .97
Number of Employees 324 192 178 173 156 138 125 115 105 100
Sales per Employee 168 173 198 170 161 159 129 122 106 85
Net Earnings per Employee 7 26 34 31 23 18 15 14 9 7
</TABLE>
*As adjusted for stock splits and stock dividends.
26
<PAGE> 1
Exhibit 23
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
reports included or incorporated by reference in this Form 10-K, into Meridian's
previously filed Registration Statements File Nos. 333-18979, 33-38488,
33-78868, 33-89214, 33-65443 and 333-74825.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
December 20, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 6,229
<SECURITIES> 1,002
<RECEIVABLES> 13,212
<ALLOWANCES> 380
<INVENTORY> 10,357
<CURRENT-ASSETS> 31,972
<PP&E> 24,193
<DEPRECIATION> 9,987
<TOTAL-ASSETS> 72,389
<CURRENT-LIABILITIES> 13,517
<BONDS> 20,000
<COMMON> 2,424
0
0
<OTHER-SE> 31,480
<TOTAL-LIABILITY-AND-EQUITY> 72,389
<SALES> 54,351
<TOTAL-REVENUES> 54,351
<CGS> 19,473
<TOTAL-COSTS> 19,473
<OTHER-EXPENSES> 27,842
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,143
<INCOME-PRETAX> 5,321
<INCOME-TAX> 2,935
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,386
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.16
</TABLE>
<PAGE> 1
EXHIBIT 99
FORWARD LOOKING STATEMENTS STATEMENT
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 Meridian's competition. While Meridian has introduced
approximately 35 internally-developed products since 1991, 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 Meridian in integrating Gull into its operations involve
greater risks and uncertainties than prior acquisitions.
