SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-14902
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Incorporated under the laws of Ohio 31-0888197
- --------------------------------------------------------------------------------
(I.R.S. Employer Identification No.)
3471 River Hills Drive
Cincinnati, Ohio 45244
(513) 271-3700
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding May 17, 1999
-------------------------- ------------------------
Common Stock, no par value 14,383,400
Page 1 of 22
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MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10Q
Page(s)
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3-4
Consolidated Balance Sheets
March 31, 1999 and September 30, 1998
Consolidated Statements of Earnings 5
Three Months Ended March 31, 1999 and 1998
Six Months Ended March 31, 1999 and 1998
Consolidated Statement of Shareholders' Equity 6
Six Months Ended March 31, 1999
Consolidated Statements of Cash Flows 7
Six Months Ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of 14-17
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 3. Submission of Matters to a Vote of Security Holders 18
Item 4. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
Exhibit 27 Financial Data Schedule 20-22
Exhibit 99 Forward Looking Statements 23-24
Page 2 of 22
<PAGE>
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
ASSETS
($000)
March 31, September 30,
1999 1998
----------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 6,508 $ 19,400
Investments 2,723 4,369
Accounts receivable and notes receivable,
less allowance of $400 in 1999
and $171 in 1998 for doubtful accounts 12,297 9,707
Inventories 9,821 5,569
Prepaid expenses and other 1,299 379
Deferred tax assets 632 339
----------- -----------
Total current assets 33,280 39,763
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 982 332
Buildings and improvements 8,803 7,095
Machinery, equipment and furniture 12,926 8,524
Construction in progress 281 171
----------- -----------
Total property, plant and equipment 22,992 16,122
Less-accumulated depreciation
and amortization 8,134 7,313
----------- -----------
Net property, plant and equipment 14,858 8,809
----------- -----------
`
OTHER ASSETS:
Long term receivables and other 951 1,035
Deferred tax assets 183 740
Deferred debenture offering costs,
net of accumulated amortization
$339 in 1999 and $271 in 1998 989 1,057
Other intangible assets, net of
accumulated amortization of $7,166
in 1999 and $6,730 in 1998 6,101 6,537
Cost in excess of net assets acquired,
net of accumulated amortization of
$1,005 in 1999 and $539 in 1998 13,810 1,206
----------- -----------
Total other assets 22,034 10,575
----------- -----------
TOTAL ASSETS $ 70,172 $ 59,147
=========== ===========
Page 3 of 22
<PAGE>
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
LIABILITIES AND SHAREHOLDERS EQUITY
($000)
March 31, September 30,
1999 1998
--------- -------------
CURRENT LIABILITIES:
Current portion of long-term
and capital lease obligations $ 875 $ 213
Notes payable 3,354 -
Accounts payable 2,731 1,050
Accrued expenses 6,000 2,606
Income taxes payable 776 -
------------ ------------
Total current liabilities 13,736 3,869
------------ ------------
LONG-TERM AND CAPITAL LEASE
OBLIGATIONS 21,724 20,595
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
1,000,000 shares authorized;
none issued - -
Common stock, no par value,
50,000,000 shares authorized;
14,383,400 and 14,382,613 shares
issued and outstanding,
respectively, stated at 2,398 2,397
Additional paid-in capital 20,657 20,653
Retained earnings 12,306 11,935
Accumulated other comprehensive
income (loss) (649) (302)
------------ ------------
Total shareholders' equity 34,712 34,683
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 70,172 $ 59,147
============ ===========
Page 4 of 22
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MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
($000, Except Per Share Amounts)
Quarter Ended Six Months Ended
March 31 March 31
--------------------- ---------------------
1999 1998 1999 1998
-------- --------- -------- ---------
NET SALES $ 14,654 $ 9,542 $ 26,373 $ 17,990
COST OF SALES 5,578 3,115 9,665 6,041
-------- -------- -------- --------
Gross profit 9,076 6,427 16,708 11,949
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 445 596 983 1,152
Selling and marketing 2,810 1,839 5,661 3,652
General and administrative 2,334 1,213 4,657 2,555
Merger integration costs 686 -- 1,212 --
-------- -------- -------- --------
Total operating expenses 6,275 3,648 12,513 7,359
-------- -------- -------- --------
Operating income 2,801 2,779 4,195 4,590
OTHER INCOME (EXPENSE):
Interest income 81 395 270 647
Interest expense (690) (399) (1,292) (803)
Other, net (92) 23 (42) 8
-------- -------- -------- --------
Total other income (expense) (701) 19 (1,064) (148)
-------- -------- -------- --------
Earnings before income taxes 2,100 2,798 3,131 4,442
INCOME TAXES 844 1,094 1,327 1,767
-------- -------- -------- --------
NET EARNINGS $ 1,256 $ 1,704 $ 1,804 $ 2,675
======== ======== ======== ========
BASIC WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 14,383 14,373 14,383 14,371
======== ======== ======== ========
BASIC EARNINGS
PER COMMON SHARE $ 0.09 $ 0.12 $ .0.13 $ 0.19
======== ======== ======== ========
DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 14,584 14,699 14,579 14,697
======== ======== ======== ========
DILUTED EARNINGS
PER COMMON SHARE $ 0.09 $ 0.12 $ 0.12 $ 0.18
======== ======== ======== ========
Page 5 of 22
<PAGE>
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
For the Six Months Ended March 31, 1999
(Unaudited)
($000)
<TABLE>
<CAPTION>
Number of Accumulated
Shares Additional Other
Issued and Comprehensive Common Paid in Comprehensive Retained
Outstanding Income Stock Capital Income(Loss) Earnings Total
----------- ------------- ------- --------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 14,382,613 - $2,397 $20,653 (302) $11,935 $34,683
Stock Issuance 400 - 1 2 - 3
Exercised Stock Options 387 - - 2 - 2
Dividends - - - - - (1,433) (1,433)
Comprehensive Income -
Net earnings - $1,804 - - - 1,804 1,804
Other comprehensive
income (loss)
Foreign currency
translation adjustment - (347) - - (347) - (347)
-----
Comprehensive Income - $1,457 - - - - -
----------- ======== ------- -------- -------- -------- --------
Balance at March 31, 1998 14,383,400 $2,398 $20,657 ($649) $12,306 $34,712
========== ====== ======= ====== ======= =======
</TABLE>
Page 6 of 22
<PAGE>
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
($000)
Six Months Ended
March 31,
--------------------------
1999 1998
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,804 $ 2,675
Non cash items:
Depreciation of property, plant and equipment 971 678
Amortization of intangible assets
and deferred royalties 970 779
Deferred income taxes 529 (188)
Change in current assets and current
liabilities net of effects of acquisition
Change in current assets excluding
cash/cash equivalents and
investments 2,108 (675)
Change in current liabilities,
excluding current portion of
long-term obligations 877 196
Long-term receivable and payable 208 (6)
---------- ----------
Net cash provided by operating activities 7,467 3,459
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Gull Laboratories, Inc.,
net of acquired cash (18,210) -
Purchase of property, plant
and equipment, net (1,118) (1,114)
Sale (purchase) of short term
investments 1,646 (2)
Purchase of product license (200) -
---------- ----------
Net cash used for investing activities (17,882) (1,116)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term obligations 3,354 177
Repayment of long-term obligations (4,301) (167)
Dividends paid (1,433) (1,689)
Proceeds from issuance of common stock 5 6
---------- ----------
Net cash used for financing activities (2,375) (1,673)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (102) (141)
---------- ----------
NET INCREASE(DECREASE)IN CASH
AND CASH EQUIVALENTS (12,892) 529
CASH & CASH EQUIVALENTS AT
BEGINNING OF PERIOD 19,400 10,523
---------- ----------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 6,508 $ 11,052
========== ==========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 373 $ 2,032
Interest 820 737
Page 7 of 22
<PAGE>
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation:
---------------------
The consolidated financial statements included herein have not been
examined by independent public accountants, but include all adjustments
(consisting of normal recurring entries) which are, in the opinion of
management, necessary for a fair presentation of the results for such
periods.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the requirements of the Securities
and Exchange Commission, although the Company believes that the disclosures
included in these consolidated financial statements are adequate to make
the information not misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-K.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the year.
2. Acquisition of Gull Laboratories, Inc.:
---------------------------------------
On November 5, 1998, the Company acquired all of the approximately eight
million shares of common stock of Gull Laboratories, Inc. (Gull) for $2.25
per share or approximately $18.0 million, in cash. The purchase price was
financed by cash and cash equivalents on hand. Gull is engaged in the
development, manufacture and marketing of high-quality diagnostic test kits
for the detection of infectious diseases and autoimmune disorders. Gull
also offers a line of instrumentation for laboratory automation and
products for blood grouping and HLA tissue typing for transplantation.
Fresenius AG, a German stock company and the former majority shareholder of
Gull ("Fresenius"), is subject to certain non-competition agreements, as
are certain employees of Gull upon their leaving the employment of the
Company. Amounts that Gull owed to Fresenius of $1,165,000, which are
classified as accounts payable in the accompanying financial statements and
are subject to various adjustments as agreed to in the purchase agreement,
will be paid to Fresenius one-half on June 15, 1999 and the remaining half
on December 31, 1999, with annual interest at 7.5%. For accounting
purposes, the acquisition was effective on October 31, 1998 and the results
of operations of Gull are included in the consolidated results of
operations of the Company from that date forward. The resulting goodwill
from this transaction is being amortized over twenty years.
The following unaudited pro forma combined results of operations for the
year ended September 30, 1998, the quarter ended March 31, 1998, and the
six months ended March 31, 1998 and March 31, 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 based on a preliminary estimate of goodwill and
adjustments to the tax provision assuming an effective tax rate of 38%, the
utilization of a portion of Gull U.S. losses and the establishment of
valuation reserves for potentially unrealizable deferred tax assets related
to pro forma operating losses.
The unaudited pro forma financial information presented is not necessarily
indicative of either the results of operations that would have occurred had
the acquisition taken place on October 1, 1997 or the results of operations
of the combined companies.
Page 8 of 22
<PAGE>
Year Ended 3 Months Ended 6 Months Ended
September 30, March 31, March 31,
1998 1998 1999 1998
------------- -------------- -------- --------
Net sales.................... $ 53,535 $ 14,682 $ 27,864 $ 28,538
Net earnings................. $ 92 $ 832 $ 1,883 $ 490
Earnings per share:
Basic..................... $ 0.01 $ 0.06 $ 0.13 $ 0.03
Diluted................... $ 0.01 $ 0.06 $ 0.13 $ 0.03
In connection with the acquisition of Gull, assets were acquired and liabilities
were assumed as follows, based upon preliminary estimates of fair values
(dollars in thousands):
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
Cash and equivalents................................. $ 642
Accounts and notes receivable........................ 3,209
Inventories.......................................... 6,019
Other current assets................................. 642
Property, plant and equipment........................ 5,618
Other non-current assets............................. 1,825
Goodwill............................................. 13,165
-------------
31,120
Less: Cash paid for net assets....................... 18,000
-------------
$ 13,120
=============
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed.................................. $ 4,030
Additional purchase liabilities...................... 1,820
Debt................................................. 5,920
Acquisition costs.................................... 1,350
-------------
$ 13,120
=============
The estimates presented above are subject to change pending the completion of
certain appraisals and other analyses of the fair value of assets acquired and
liabilities assumed, and finalization of October 31, 1998 audit adjustments. The
allocation of purchase price may include an allocation to in-process research
and development. In fiscal 2000, the Company plans to close the Salt Lake City
and certain other facilities of Gull, sell the Gull land and buildings in Salt
Lake City, transfer equipment, technology and manufacturing capabilities to the
Company's headquarters in Cincinnati and terminate substantially all Gull
employees. Additional purchase liabilities recorded to date include
approximately $1,820,000 for severance and costs related to the shut down and
consolidation of the acquired facilities in Salt Lake City and Germany, plus
certain deferred tax liabilities. Future liabilities to be recorded will include
additional costs associated with the shut down and consolidation of these
facilities once such costs are identified.
Page 9 of 22
<PAGE>
Inventories:
------------
Inventories are comprised of the following (amounts in thousands):
March 31, 1999 September 30, 1998
--------------- ------------------
Raw materials $2,833 $1,480
Work-in-process 2,129 1,715
Finished goods 4,859 2,374
====== =======
$9,821 $5,569
====== =======
3. Income Taxes:
The provisions for income taxes were computed at the estimated annualized
effective tax rates utilizing current tax law in effect, after giving
effect to research and experimentation credits and recognizing the benefit
of Gull post-acquisition losses incurred in Europe.
4. Earnings Per Common Share:
Basic earnings per share (EPS) is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding. Diluted EPS is computed by adding to the weighted average
number of common shares outstanding, the dilutive effect of additional
common shares that would have been outstanding if dilutive potential common
shares had been issued.
At both March 31, 1999 and 1998, the impact of assuming the 1996
convertible debentures were converted, net of the impact of pro forma,
after tax interest expense, was antidilutive. The table below shows the
amounts used in computing earnings per share and the effect on income and
the weighted average number of shares for the three-month and six-month
periods ended March 31, 1999 and March 31, 1998 of dilutive potential
common stock.
Page 10 of 22
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------
March 31, 1999 March 31, 1998
------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------ --------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
In thousands,
except per share
amounts
BASIC
EARNINGS PER
SHARE
Net income
available
to common
shareholders $1,256 14,383 $0.09 $1,704 14,373 $0.12
- ---------------------------------------------------------------------------------------------
EFFECT OF DILUTIVE
SECURITIES
Stock Options - 201 - - 326 -
- ---------------------------------------------------------------------------------------------
DILUTED EARNINGS
PER SHARE
Net income
available
to common
shareholders
and assumed
conversions $1,256 14,584 $0.09 $1,704 14,699 $0.12
=============================================================================================
</TABLE>
Page 11 of 22
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------------------------------------------------
March 31, 1999 March 31, 1998
------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------ --------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
In thousands,
except per share
amounts
BASIC
EARNINGS PER
SHARE
Net income
available
to common
shareholders $1,804 14,383 $0.13 $2,675 14,371 $0.19
- ---------------------------------------------------------------------------------------------
EFFECT OF DILUTIVE
SECURITIES
Stock Options - 196 - - 326 -
- ---------------------------------------------------------------------------------------------
DILUTED EARNINGS
PER SHARE
Net income
available
to common
shareholders
and assumed
conversions $1,804 14,579 $0.12 $2,675 14,697 $0.18
=============================================================================================
</TABLE>
5. Translation of Foreign Currency:
-------------------------------
Assets and liabilities of foreign operations are translated using quarter
end exchange rates. Revenues and expenses are translated using exchange
rates prevailing during the period with gains or losses resulting from
translation included in a separate component of other comprehensive income
(loss). Gains and losses resulting from transactions in foreign currencies
were immaterial.
6. Comprehensive Income:
--------------------
During 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130 (Statement 130) on "Reporting Comprehensive Income". The
Company adopted this standard effective October 1,1998. The objective of
Statement 130 is to report a measure of all changes in the equity of an
enterprise that result from transactions and other economic events of the
period other than transactions with owners ("comprehensive income").
Comprehensive income (loss) is the total of net income (loss) and all other
non-owner changes in equity. For the Company, this reporting involves gains
and losses resulting from the translation of assets and liabilities of
foreign operations.
Page 12 of 22
<PAGE>
7. Segment Information:
-------------------
During 1997, the FASB issued Statement No. 131 (Statement 131) on
"Disclosure About Segments of an Enterprise and Related Information". The
Company will adopt Statement 131 this fiscal year; however, there are no
interim reporting requirements in the initial year of adoption. The Company
is still evaluating the impact of the new disclosure requirements in light
of the Gull acquisition. New disclosure requirements, if any, will not
impact the Company's financial position or results of operation.
8. Reclassifications:
-----------------
Certain reclassifications have been made to the accompanying financial
statements to conform to the March 31, 1999 presentation.
10. Recently Issued Accounting Standards:
------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at
its fair value. The Company does not currently hold nor invest in any type
of derivative instruments.
In March 1998, the AICPA issued SOP98-1- "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" which requires
capitalization of external direct costs of materials and services consumed
in developing or obtaining internal-use computer software; payroll and
payroll-related costs for employees who are directly associated with and
who devote time to the internal-use computer software project (to the
extent of the time spent directly on the project); and interest costs
incurred when developing computer software for internal use. Training
costs, data conversion costs, costs incurred in the preliminary project
stage and maintenance fees should be expensed as incurred. Additionally,
significant updates and enhancements are capitalized if it is probable that
the result will be significant additional functionality or an increase in
the life of the software. The capitalization of computer software developed
or obtained for internal use should be amortized on a straight-line basis
unless another systematic and rational manner is more representative of the
use of the software. This SOP is effective for financial statements for
fiscal years beginning after December 15, 1998 (the Company's fiscal year
2000), and should be applied to internal-use computer software costs
incurred in those fiscal years for all projects, including projects in
progress upon initial application of the SOP. The Company does not expect
adoption of this accounting pronouncement will have a material impact on
the Company's financial position or operating results.
Page 13 of 22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Background
- ----------
On November 5, 1998, the Company acquired all of the approximately eight million
shares of common stock of Gull Laboratories, Inc. (Gull) for $2.25 per share or
approximately $18.0 million, in cash. The purchase price was financed by cash
and cash equivalents on hand. Gull is engaged in the development, manufacture
and marketing of high-quality diagnostic test kits for the detection of
infectious diseases and autoimmune disorders. Gull also offers a line of
instrumentation for laboratory automation and products for blood grouping and
HLA tissue typing for transplantation. Fresenius AG, a German stock company and
the former majority shareholder of Gull ("Fresenius"), is subject to certain
non-competition agreements, as are certain employees of Gull upon their leaving
the employment of the Company. Amounts that Gull owed to Fresenius of
$1,165,000, which are classified as accounts payable in the accompanying
financial statements and are subject to various adjustments as agreed to in the
purchase agreement, will be paid to Fresenius one-half on June 15, 1999 and the
remaining half on December 31, 1999, with annual interest at 7.5%. For
accounting purposes, the acquisition was effective on October 31, 1998 and the
results of operations of Gull are included in the consolidated results of
operations of the Company from that date forward. The resulting goodwill from
this transaction is being amortized over twenty years. See Note 2 of the Notes
to Consolidated Financial Statements for further information.
Results of Operations:
- ---------------------
Consolidated net sales increased $5,112,000, or 54%, to $14,654,000 for the
second fiscal quarter and increased $8,383,000, or 47%, to $26,373,000, for the
six months ended March 31, 1999, largely from the continued strong performance
of the Gull products. These increases of $5,112,000 and $8,383,000 respectively,
for the quarter are comprised of volume growth of $4,505,000, or 47%, pricing of
$511,000, or 6%, and currency of $96,000, or 1%; for the six months, volume
growth of $7,475,000, or 42%, pricing of $749,000, or 4%, and currency of
$159,000, or 1%.
Core business product sales increased about 3% for the quarter versus the prior
year, a significant recovery from the first fiscal quarter which was down 6%
versus the previous year as a result of distributor order patterns in the U.S.
and Europe. New product sales led by Premier Platinum HpSA(TM) (H. pylori),
contributed over $600,000 and $1,000,000 of incremental revenues for the quarter
and six-month periods respectively. OEM sales for the quarter increased about
$65,000, or 37%, but remain below the prior year six-month results. This
decrease in the year-to-date sales versus the prior year is primarily in the
virology and mononucleosis products and is expected to continue to decline for
the remainder of the year, however, the impact on financial results is not
material. With the exception of C. difficile, all other major product lines
performed favorably in the second fiscal quarter versus the prior year same
period.
Gross profit increased $2,649,000 or 41% for the quarter and $4,759,000 or 40%,
for the six-month period compared to the sales increase of 54% for the quarter
and 47% for the six-month period. Gross profit decreased as a percentage of
sales to 62% from 67% for the quarter and to 63% from 66% for the six-month
period. For the quarter, the gross profit reflects improvement of 4% due to
increased sales of Premier Platinum HpSA and improved pricing as noted above.
Offsetting these improvements in gross profit is the impact of the higher level
of Gull sales at lower margins than historical Meridian levels causing an
overall decrease in the margin of 8.0%. These same factors contributed to the
decline in gross profit for the six-month period compared to the prior year. The
Company expects that this drag on the overall gross profit will continue until
the Company is able to complete the integration of Gull's production into the
Cincinnati facilities and the sellout of Gull's Salt Lake City production, which
is expected to occur in about 12 months.
Page 14 of 22
<PAGE>
Total operating expenses increased $2,627,000, or 72% for the second fiscal
quarter versus the prior year, and increased to 43% of sales from 38% versus the
same period last year, primarily due to the Gull acquisition. Similarly,
expenses for the six-month period compared to the prior year increased
approximately 70%, and increased to 47% from 41% as a percent of sales. Research
and development costs decreased $151,000 to 3% of sales from 6% for the quarter
and decreased $169,000, declining to 4% of sales from 6% for the six month
period. Clinical study costs for Premier Platinum HpSA related to United States
Food and Drug Administration (FDA) approval (which was obtained in May 1998)
were incurred in both the second quarter and six-month period last year. This
decrease was offset partially by research and development costs of Gull in the
second fiscal quarter and six-month period. By March 1, 1999, all research and
development activity was consolidated at Meridian's headquarters in Cincinnati.
Selling and marketing expenses increased $971,000, or 53%, for the second fiscal
quarter and $2,009,000 or 55% for the six-month period. Selling and marketing
costs remained flat as a percent of sales at 19% for the second quarter and
increased slightly to 21% from 20% for the six-month period. General and
administrative costs increased $1,121,000 or 92% and increased as a percent of
sales to 16% from 13% for the second quarter. General and administrative costs
increased $2,102,000 or 82% for the six-month period and increased as a percent
of sales to 18% from 14%. This increase is also attributable to the Gull
acquisition, including $283,000 of amortization cost on Gull-related goodwill
for the quarter and $413,000 for the six-month period. In connection with the
Gull acquisition, the Company incurred merger integration costs of approximately
$686,000 during the second fiscal quarter and $1,212,000 for the six-month
period. These costs consist mainly of payments of $150,000 during the quarter
and $430,000 for the six-month period made to distributors to terminate
contracts in markets with duplicate distributor agreements or in markets that
will now be covered by Company sales forces, and approximately $536,000 for the
quarter and $782,000 for the six-month period related to training, travel,
product validation and consulting charges in connection with the integration of
the Gull business. Additional merger integration costs are expected to be
incurred in connection with the ongoing integration efforts.
Operating income increased $22,000 or 1%, declining as a percent of sales to 19%
from 29% for the quarter, and decreased $395,000, declining as a percent of
sales to 16% from 26% for the six-month period. Excluding the merger integration
costs of $686,000 for the quarter and $1,212,000 for the six-month period,
operating income increased $708,000, or 25% and $817,000 or 18%, respectively.
Other expense increased $720,000 for the second fiscal quarter and $916,000 for
the six-month period. This increase is primarily related to $291,000 in interest
expense for the quarter and $489,000 for the six-month period for Gull-related
obligations coupled with the effect of a reduction in interest income of
$314,000 for the quarter and $377,000 for the six-month period due to the use of
cash and investments to acquire Gull. The Company's effective tax rate increased
from 39% to 40% for the second quarter and increased from 40% to 42% for the
six-month period. Based on tax planning strategies developed in the second
quarter, the Company elected to record a benefit for the full amount of
post-acquisition operating losses incurred to date in Gull's foreign operations.
Overall, the tax rate has increased over last year's comparative periods due to
the amortization of Gull acquisition related goodwill which is not deductible
for book or tax purposes.
Liquidity and Capital Resources
The Company's cash flow requirements mainly consist of working capital for
operations, capital expenditures, dividends on common stock and debt repayment.
Net cash flows provided by operations increased $4,008,000 for the six months
ended March 31, 1999, primarily due to cash funded by working capital items.
Net cash used for investing activities increased $16,766,000 mainly as a result
of cash paid for the purchase of Gull of $18,210,000, which includes transaction
costs of $850,000 paid during the six month period and is net of cash acquired
of $640,000.
Net cash flows used for financing activities increased $702,000 largely due to
payments made on debt obligations assumed in the Gull acquisition. Gull debt of
$3,354,000 was refinanced during the quarter.
Page 15 of 22
<PAGE>
Net cash flows from operations are anticipated to fund working capital
requirements for the balance of the fiscal year. The Company has an unused
$11,641,000 line of credit with a commercial bank and cash/cash equivalent and
short-term investments of $9,231,000 at March 31, 1999. For the year, the
Company expects to incur capital expenditures of approximately $4,200,000, which
includes $3,000,000 for the renovation of the Cincinnati manufacturing
facilities related to the integration of Gull product manufacturing and $500,000
related to new computer systems in Europe.
Year 2000 Readiness Disclosure
The Year 2000 issue results from date sensitive computer programs that only use
the last two digits to refer to a year. Such computer programs may not properly
recognize years subsequent to 1999. This issue impacts the Company and virtually
every business that relies on a computer. If not corrected, system failures or
miscalculations could occur causing disruption of the Company's operations,
including among other things, a temporary inability to process transactions or
to engage in similar normal business activities.
A project team has been formed to address the Company's Year 2000 readiness.
Information technology (IT) systems, such as any hardware or software used to
process daily operational data and information, as well as non-information
technology systems, such as computer chips embedded in manufacturing, laboratory
and telecommunications equipment, are being assessed for Year 2000 compliance.
This assessment is substantially complete.
In November 1997, the Company completed a major upgrade of its computer hardware
and primary business system applications in the U.S. as part of planned system
enhancements to support the business. The cost of the upgrades, which are Year
2000 compliant, was approximately $400,000. The Company has substantially
completed its assessment of the compliance of other IT and non-IT systems in the
U.S. Remediation efforts, which are already underway, include modifications or
replacement of software and certain hardware. The Company anticipates completion
of all remediation and testing of its systems by the end of fiscal 1999. The
Company's current business systems in Belgium and Germany are being replaced and
the system in Italy is scheduled to be upgraded. These locations are primarily
involved in sales and distribution functions and do not manufacture product.
Non-IT systems in European locations are being assessed. The Company expects
that many of the existing Gull operations and related systems in the U.S. will
be integrated into the Meridian operation during fiscal year 1999. The Company
has also addressed the status of instrumentation equipment leased to customers
and plans to replace or upgrade the equipment to the extent it is not compliant.
The Company is evaluating the status of significant customers and suppliers to
determine the extent to which it is vulnerable to these third parties. Ongoing
evaluation will continue through 1999; however, the Company believes its broad
customer base and availability of alternate suppliers will mitigate the risks
associated with these third parties.
The Company is in the process of developing a formal contingency plan for
mission critical business processes in the event its Year 2000 efforts are not
completed in a timely manner. For example, the contingency plan for an IT system
may be to revert to a manual system, and, for many non-IT systems, internal
clocks could be reset to an earlier date. The formal contingency plan will be
further expanded, as required, as remediation and testing procedures are
completed in 1999.
Costs specifically associated with the Company's Year 2000 efforts to date have
consisted mainly of internal costs and have been immaterial. Planned additional
costs pertain primarily to capital expenditures such as systems software and
hardware replacements and upgrades and non-IT systems replacements and upgrades
and are estimated to be $750,000.
Page 16 of 22
<PAGE>
Although the Company has not yet completed its Year 2000 efforts, after certain
upgrades and replacements are made, it believes the Year 2000 issue will not
pose significant operational problems. However, if such modifications are not
made or are not completed in time, or if a material third party fails to
properly remediate its Year 2000 issues, or if the costs are higher than
expected, the Year 2000 issue could have a material effect on the Company's
operations. While the Company is not aware of any significant exposure, there
can be no assurance that the Year 2000 issue will not have a material impact on
the business and operations of the Company.
The Company is also in the process of assessing the impact of the conversion to
the Euro on its systems and business operations. The conversions and upgrades of
the European systems noted above will also enable these operations to process
Euro transactions. Currently, the Company has significant sales in Europe,
certain of which are denominated in U.S. dollars. When fully adopted, the use of
a single currency in participating countries may affect pricing of transactions
due to the transparency of prices. Factors such as local taxes, freight and
handling costs, and customer preferences may eliminate the need for price
adjustments. With the acquisition of Gull and the related increase in European
sales, the Company is currently evaluating the impact of this conversion.
Page 17 of 22
<PAGE>
PART II. OTHER INFORMATION
Item 3. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on January 21, 1999. Each
of the following matters was voted upon and approved by the Company's
shareholders as indicated below:
(1) Election of the following six directors:
(a) James A. Buzard, 13,070,067 votes for, 120,745 withheld and 0
abstentions.
(b) John A. Kraeutler, 13,076,180 votes for, 114,632 withheld and 0
abstentions.
(c) Gary P. Kreider, 13,077,111 votes for, 113,701 withheld and 0
abstentions.
(d) William J. Motto, 13,076,118 votes for, 114,694 withheld and 0
abstentions.
(e) Robert J. Ready, 13,075,406 votes for, 115,406 withheld and 0
abstentions.
(f) Jerry Ruyan, 13,073,783 votes for, 117,029 withheld and 0
abstentions
(2) Approval of the 1999 Directors' Stock Option Plan, 12,737,715 votes
for, 379,314 against and 221,522 abstentions.
(3) Approval of Amending and Restating the Company's 1996 Stock Option
Plan, 12,109,068 votes for 1,094,385 against and 77,357 abstentions
(4) Ratification of the appointment of Arthur Andersen LLP as the
Company's independent public accounts for fiscal year 1999, 13,120,002
votes for, 34,299 against and 37,512 abstentions.
Item 4. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description Page(s)
----------- ----------- -------
27 Financial Data Schedule 20-22
99 Forward Looking Statements 23-24
(b) Reports on Form 8-K: Form 8-K/A was filed on January 19, 1999
reporting under Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits.
Page 18 of 22
<PAGE>
Signature:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there-unto duly authorized.
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Date: May 17, 1999 /S/GERARD BLAIN
-------------------------------------------
Gerard Blain, Vice President,
Chief Financial Officer
(Principal Financial Officer)
Page 19 of 22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 6,508
<SECURITIES> 2,723
<RECEIVABLES> 12,497
<ALLOWANCES> 400
<INVENTORY> 9,821
<CURRENT-ASSETS> 33,280
<PP&E> 22,992
<DEPRECIATION> 8,134
<TOTAL-ASSETS> 70,172
<CURRENT-LIABILITIES> 13,736
<BONDS> 21,724
0
0
<COMMON> 2,398
<OTHER-SE> 32,314
<TOTAL-LIABILITY-AND-EQUITY> 70,172
<SALES> 26,373
<TOTAL-REVENUES> 26,373
<CGS> 9,665
<TOTAL-COSTS> 9,665
<OTHER-EXPENSES> 12,513
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,292
<INCOME-PRETAX> 3,131
<INCOME-TAX> 1,327
<INCOME-CONTINUING> 1,804
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,804
<EPS-PRIMARY> 14,383
<EPS-DILUTED> 14,579
</TABLE>
EXHIBIT 99
FORWARD LOOKING STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from
civil litigation in many instances for forward-looking statements. In order to
take advantage of the Act, such statements must be accompanied by meaningful
cautionary statements that identify important factors that could cause actual
results to differ materially from those that might be projected. This Exhibit is
being filed in order to allow the Company to take advantage to the new
provisions of this Act by providing the following cautionary statements.
Risk Factors Affecting the Company
- ----------------------------------
The Company's business operations and strategy are subject to a number of
uncertainties and risks which could adversely affect its performance in the
future. Among these are the following:
One of the Company's main growth strategies is the acquisition of other
companies and/or product lines in the disposable diagnostic test kits business.
Although previous acquisitions have been successful to date, there can be no
assurance that additional acquisitions will be consummated or that, if
acquisitions are consummated, they will be successful. Because of Gull's size,
the challenges faced by the Company in integrating Gull into its operations
involves greater risks and uncertainties than prior acquisitions. Acquisitions
require a significant commitment of corporate resources, management attention
and capital which, in certain cases, could exceed that available to the Company.
In addition, the benefits expected from such acquisitions will not be achieved
fully unless the operations of the acquired entities are successfully integrated
with those of the Company.
The diagnostic test industry is characterized by ongoing technological
developments and changing customer requirements. The Company's success and
continued growth depend, in part, on its ability to develop or acquire rights
to, and successfully introduce into the marketplace, enhancements of existing
products or new products that incorporate technological advances, meet customer
requirements and respond to products developed by the Company's competition.
While the Company has introduced over twenty new products since 1991, there can
be no assurance that it will be successful in developing or acquiring such
rights to products on a timely basis or that such products will adequately
address the changing needs of the marketplace.
Approximately 27% of the Company's net sales for fiscal 1998 were attributable
to international sales, primarily in Western Europe. Although the majority of
the Company's international sales have been made in U.S. dollars, the Company is
subject to the risks associated with fluctuations in currency exchange rates.
The Company is also subject to other risks associated with international
operations, including tariff regulations, requirements for export licenses and
medical licensing and approval requirements.
Page 21 of 22
<PAGE>
The healthcare industry is in transition with a number of changes that affect
the market for diagnostic test products. Changes in the healthcare delivery
system have resulted in major consolidation among reference laboratories and in
the formation of multi-hospital alliances, reducing the number of institutional
customers for diagnostic test products. There can be no assurance that the
Company will be able to enter into and/or sustain contractual or other marketing
or distribution arrangements on a satisfactory commercial basis with these
institutional customers.
Many of the Company's competitors have greater financial and other resources
than the Company. These resources could give them an advantage in price, service
and development of competing products.
In recent years, the federal government has been examining the nation's
healthcare system from numerous standpoints, including the cost of and access to
health care and health insurance. Proposals impacting the health care system are
constantly under consideration and could be adopted at any time. It is unclear
what effect the enactment of such proposals would have on the Company.
Page 22 of 22
