<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, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________
TO__________________.
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. [ ]
The aggregate market value of Common Stock held by non-affiliates is $53,641,941
based on a closing sale price of $5.56 per share on December 8, 2000. As of
December 8, 2000, 14,597,614 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 2000 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 2001 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>
Item 1 Business ................................................................................ 1
Item 2 Properties ..............................................................................12
Item 3 Legal Proceedings .......................................................................13
Item 4 Submission of Matters to a Vote of Security Holders .....................................14
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ...................14
Item 6 Selected Financial Data .................................................................14
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ...15
Item 7A Quantitative and Qualitative Disclosures about Market Risk .............................15
Item 8 Financial Statements and Supplementary Data .............................................15
Item 9 Disagreements on Accounting and Financial Disclosure ....................................16
Part III
Item 10 Directors and Executive Officers of the Registrant. ....................................16
Item 11 Executive Compensation .................................................................16
Item 12 Security Ownership of Certain Beneficial Owners and Management .........................16
Item 13 Certain Relationships and Related Transactions .........................................16
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................16
</TABLE>
i
<PAGE> 3
PART I.
ITEM 1.
BUSINESS
--------
GENERAL
Meridian is a fully integrated life sciences company that 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,
and also offers biopharmaceutical capabilities. Meridian's diagnostics 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 diagnostics products are
used in procedures performed in vitro (outside the body) and enhance patient
well-being while reducing total outcome costs of healthcare. In addition to the
diagnostic business, Meridian is expanding further into the area of life
sciences. Through recent acquisitions, Meridian has the technical expertise to
enable research efforts of genomics scientists in drug and vaccine development.
The expansion into life sciences prompted the Company's decision to change its
official name to Meridian Bioscience, Inc., subject to shareholder approval in
January 2001.
Meridian's product development strategy is to combine existing technologies with
new product designs both through internal or joint product development and
through product acquisitions, licensing or supply arrangements. Internal and
joint 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, France, Belgium
and the Netherlands, supplemented by a network of national and international
distributors. International sales in more than 60 countries were 31% of total
fiscal 2000 sales.
During the fourth quarter of fiscal 2000, a plan was implemented to restructure
European distribution operations and eliminate the Company's direct presence in
Germany. This plan involves (i) the shutdown of the German distribution center,
(ii) the transfer of the export business from Germany to the Company's Belgian
operations and (iii) movement of the German in-country business to an
independent distributor. This plan was adopted as a means to improve operating
results in Europe.
1
<PAGE> 4
ACQUISITIONS AND ALLIANCES
An important facet of Meridian's long-term business strategy is the expansion
into life sciences, as well as 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. Prior to fiscal
2000, Meridian's management had 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 included
the acquisition of Gull Laboratories, Inc. in fiscal 1999, the acquisition of
the enteric product line of Cambridge Biotech Corporation in fiscal 1996, the
acquisitions of the infections disease and mononucleosis product lines of
Johnson & Johnson in fiscal 1994 and 1993, respectively, and numerous smaller
product acquisitions and licensing arrangements.
In the late fiscal 2000, Meridian completed its acquisition of Viral Antigens,
Inc. VAI further expands Meridian's life sciences capabilities through VAI's
protein expression lab which provides Meridian the opportunity to serve as an
enabler to biopharmaceutical companies in the development of new drugs and
vaccines. VAI also manufactures infectious disease antigens that are used in
immunodiagnostics testing, and a Pseudorabies Virus antibody test kit and equine
infectious anemia antibody test kit for the veterinary market.
The purchase price for VAI was $9 million in cash, and was funded with bank debt
from the Company's existing credit facilities. The purchase agreement provides
for additional consideration, up to $8.25 million, contingent upon VAI's future
earnings though September 30, 2006. See Note 2 to the consolidated financial
statements for further information. On September 29, 2000, Meridian filed on
Form 8-K/A certain financial statements and pro forma financial information
relating to this acquisition.
Also during fiscal 2000, Meridian executed a Research and Development Agreement
and an Exclusive Supply Agreement with OraSure Technologies, Inc. to
commercialize the Uplink technology. Meridian believes that this technology will
offer competitive advantages including the elimination of background
interference, simultaneous detection of multiple biological markers and improved
sensitivity. These agreements require Meridian to make future payments to
OraSure to fund research and development costs and to obtain an exclusive
license to market and sell related products on a global basis.
In early fiscal 1999, Meridian acquired Gull Laboratories, Inc. for $19 million
in cash. 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.
Included in the Gull acquisition was its subsidiary, BIODESIGN International,
which manufactures and markets antigens and
2
<PAGE> 5
antibodies to diagnostic and pharmaceutical manufacturers as well as academic
researchers.
During fiscal 2000, Meridian completed the transfer of Gull's Salt Lake City
production to the Company's Cincinnati facilities, and the sale of the Salt Lake
City facilities and real estate. During fiscal 1999, Meridian shut down Gull's
European manufacturing activities. See Note 2 to the consolidated financial
statements for further information.
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 on hand and available lines of credit.
IMMUNODIAGNOSTICS OVERVIEW
In vitro diagnostic testing is the process of analyzing constituents of blood,
urine, stool, other body fluids or tissue for the presence of specific
infectious diseases. Immunodiagnostic testing, which is the leading method of in
vitro testing for infectious diseases, tests for antigens and antibodies. When
an infectious disease caused by pathogens, such as bacteria, viruses and fungi,
and their related antigens are present, the body responds by producing an
antibody. The antibody binds specifically with the antigen in a lock-and-key
fashion and initiates a biochemical reaction to attempt to neutralize and,
ultimately, to eliminate the antigen. The ability of an antibody to bind with a
specific antigen provides the basis for immunodiagnostic testing.
Immunodiagnostic testing detects the presence of specific infectious diseases
through "visualization", such as color changes or the formation of visible
aggregates, of the biochemical reactions caused by the antigen/antibody. Most
immunodiagnostic tests utilize one of two alternative methods to determine the
presence of a specific disease in a patient specimen. In one method, the test
employs the antibody to detect directly the presence of an antigen.
Alternatively, certain tests employ the antigen to detect the presence of an
antibody. In addition to the diagnosis of infectious diseases, immunodiagnostic
testing is also used to monitor the status of various patient therapy programs.
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.
3
<PAGE> 6
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.
BUSINESS STRATEGY
Meridian continues to execute its long-term strategy consisting of the following
elements:
Developing New Product Applications from Core Technologies - 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. In the last ten years, Meridian has developed 35 new
products, including one new product in fiscal 2000.
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. In the last ten
years, Meridian has acquired, licensed or entered into supply arrangements
relating to approximately 100 products. The Gull acquisition accounted for 65 of
the 100 products.
Enabling Biomedical Research and Early Stage Biopharmaceutical Development -
Meridian intends to leverage its skills and capabilities in the life sciences
market. Meridian has an established position in this market through its
BIODESIGN subsidiary. BIODESIGN manufactures and distributes essential antigen
and antibody reagents to diagnostic and
4
<PAGE> 7
pharmaceutical manufacturers as well as academic researchers. These reagents are
essential to the development of assay systems, control standards and new drug
development research.
During fiscal 2000, Meridian further improved its skills and capabilities in the
life sciences market through the acquisition of VAI and the expansion of outside
collaborations with academic and government research laboratories. VAI recently
completed the installation of a pharmaceutical quality proteomics laboratory
that will be used to produce drug and vaccine proteins through gene expression
techniques. These proteins will be used by biopharmaceutical companies in the
development of drugs and vaccines for Phase I, II and III clinical trials.
In September 2000, Meridian expanded its relationship with Texas Tech University
Health Sciences Center for the development of highly specific, gene-mediated
antigen and antibody systems. Texas Tech's capabilities utilize gene
manipulation technologies to produce proteins that are reproducible and specific
for a variety of disease states.
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 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 Asia. Over the last six years, Meridian's
international sales have grown from $2.1 million in fiscal 1993 to $17.7 million
in fiscal 2000 and represented 31% of total consolidated sales in fiscal 2000.
Strengthening 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 fiscal 1999 and 1998, 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 fiscal 2000 and 1999,
Meridian extended or renewed supply agreements with several major reference
laboratories and other consolidated health care providers.
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.
5
<PAGE> 8
PRODUCTS AND MARKETS
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 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), Macro-CON(R) and Spin-CON.
Meridian's product line, including products acquired in the VAI and Gull
acquisitions, consists of over 250 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 follows.
Parasitic Diseases - Meridian manufactures products for the diagnosis and
collection, preservation, transportation and concentration of parasites.
Parasitic diseases include Giardiasis,
6
<PAGE> 9
Cryptosporidiosis, Amebiasis and Lyme disease. The markets for these products
are hospital, reference and veterinary laboratoties.
Gastrointestinal Diseases - Meridian manufactures products for the rapid
diagnosis of stomach ulcers, toxigenic E.coli, antibiotic associated diarrhea
(C. difficile) and pediatric diarrhea (Rotavirus and Adenovirus). The markets
for these products are hospital, reference, veterinary and state health
laboratories.
Respiratory Diseases - Meridian manufactures a broad range of diagnostic
reagents for detecting respiratory diseases including pneumonia (mycoplasma
pneumoniae) and valley fever (coccidioides immittis). The markets for these
products are hospital, reference, veterinary and state health laboratories.
Urogenital Diseases - Meridian manufactures products for the rapid detection of
urinary tract infection and Chlamydia. The markets for these products are
hospital, reference, physicians' office and public health laboratories.
Viral Diseases - Meridian manufactures a broad range of products for the
detection of various viruses including Epstein -Barr (mononucleosis), Herpes
simplex, Cytomegalovirus (organ transplant infections) and Varicella -Zoster
(chicken pox and shingles). The markets for these products are hospital,
reference, physicians' office and public health laboratories.
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
7
<PAGE> 10
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, 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 18 technical sales
representatives. In Europe, Meridian's sales force consists of a vice president
of sales and marketing, six sales and marketing managers, two product managers,
five product specialists and 20 technical sales representatives. Where Meridian
utilizes distributors, Meridian participates in selling efforts involving key
customers. 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 Nivelle,
Belgium.
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 ten years, Meridian has developed internally 35 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 staffs are experts in binding various biological materials
to numerous solid phases, including plastics, membranes, latex beads,
immunofluorescent 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 14 research scientists. The disciplines represented in the
group include biochemistry, immunology, mycology, bacteriology, virology and
parasitology. In fiscal 1998, fiscal 1999 and fiscal 2000, Meridian spent $2.0
million, $2.0 million, and $2.3 million
8
<PAGE> 11
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. Meridian also serves as an original
equipment manufacturer for other diagnostic companies. Two distributors together
accounted for more than 25% of Meridian's fiscal 2000 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
During fiscal 2000, substantially all of Meridian's manufacturing was performed
at its Cincinnati, Ohio facility. Meridian's acquisition of VAI has added
additional manufacturing capacity in Memphis, Tennessee. VAI's manufacturing of
veterinary products is regulated by the USDA and VAI's proteomics laboratory is
regulated by CBER (see Government Regulation). VAI's manufacturing facilities
are also subject to audit by certain customers. To maintain the highest quality
standards, Meridian utilizes both external and internal quality auditors who
routinely evaluate Meridian's manufacturing processes. Meridian strives to
quickly evaluate, remedy and review the implementation of corrective actions to
further assure compliance with medical device regulation.
Meridian is required to comply with, among other regulations, the FDA's Quality
System Regulation and is subject to periodic audits by the FDA. In response to
audits conducted in fiscal 2000, the Company implemented various programs to
address necessary corrective actions which it identified and increased its
quality assurance and control staffing. The costs attributable to the additional
staff and consulting assistance for fiscal 2000 were approximately $800,000. The
FDA is currently conducting a follow-up audit and is reviewing certain
validation procedures for certain products. The Company is fully cooperating
with the FDA in an effort to complete this process. While the outcome of the
audit is unknown at this time, if the FDA requires that validation procedures be
re-performed, the Company estimates that the lost revenue impact, while the
product is being re-validated and not available for sale, and the potential
work-in-process inventory that is not saleable, could be significant.
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 key 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
9
<PAGE> 12
products. Meridian believes it has sufficient manufacturing capacity for
anticipated growth. Meridian Diagnostics Europe s.r.l. achieved ISO 9002
certification in fiscal 1998, BIODESIGN achieved ISO 9001 certification in
fiscal 2000 and Meridian is working towards achieving ISO 9000 certification in
Cincinnati in fiscal 2001.
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 25 of its
products, including a patent for Premier Platinum HpSA(TM) issued in February
1998. The Company's VAI subsidiary has U.S. patents for four of its
manufacturing processes. The patents or licenses for most of Meridian's 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 manufacturing techniques and processes. Meridian's
laboratory and research personnel are required to execute confidentiality
agreements designed to protect Meridian's proprietary products.
10
<PAGE> 13
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 pre-market 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 Mexico, Korea, Japan,
China and Argentina via the distributors in the respective countries.
VAI's veterinary products are approved and licensed by the United States
Department of Agriculture (USDA). This typically requires six months to one year
for the approval process. In addition, assays for monitoring "controlled
diseases" require testing and release of each production serial before it is
available to the market.
11
<PAGE> 14
The proteins produced in VAI's proteomics laboratory are intended to be used as
"injectibles". As such they are produced under more stringent regulations under
the auspices of the Center for Biologicals Evaluation & Research (CBER).
Approval and licensing, following clinical trials, of these products will be the
responsibility of the company that owns the rights to each protein. Such
products are approved under the "pre-market approval" guidelines which requires
substantially more time than 510(k) clearance.
The Clinical Laboratory Improvement Act of 1988 prohibits laboratories from
performing in vitro tests for the purpose of providing information for the
diagnosis, prevention or treatment of any disease or impairment of, or the
assessment of, the health of human beings unless there is in effect for such
laboratories a certificate issued by the U.S. Department of Health and Human
Services applicable to the category of examination or procedure performed.
Although these certificates are required only for 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, 2000, Meridian had 369 full-time employees, including 75 in
sales, marketing and technical support, 106 in manufacturing, 15 in research and
product development, and 35 in administration and finance. 93 of Meridian's
employees hold scientific degrees.
Meridian maintains a Savings and Investment Plan for its U.S. employees and has
established stock option plans for its officers, directors and employees. In
addition, 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.
ITEM 2.
PROPERTIES
----------
Meridian's corporate offices, manufacturing facility and research and
development facility are located in three buildings totaling approximately
94,000 square feet on 6.2 acres of land in a suburb of Cincinnati. These
properties are owned by Meridian. Meridian has approximately
12
<PAGE> 15
51,000 square feet of manufacturing space and 9,000 square feet of warehouse
space in the Cincinnati facility.
In the VAI acquisition, Meridian acquired VAI's executive offices and
manufacturing facility located in Memphis, Tennessee. This facility is comprised
of two buildings totaling approximately 31,000 square feet, including
approximately 25,000 square feet of manufacturing space.
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. Both
the land and the building were sold during fiscal 2000.
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.
Meridian rents approximately 3,000 square feet of space in Nivelle, Belgium for
sales, warehousing and distribution. The lease expires in 2009. Meridian also
rents office space in France and the Netherlands for small sales offices.
ITEM 3.
LEGAL PROCEEDINGS
-----------------
In June 2000, Meridian filed suit against a former employee and certain other
defendants for breach of an employment agreement and misappropriation of trade
secrets. The lawsuit seeks injunctive relief as well as compensatory and
punitive damages against the defendants. Meridian successfully obtained a
temporary restraining order and a preliminary injunction against its former
employee. Meridian intends to seek recovery from the defendants for its damages,
costs and expenses, including its legal fees which amounted to approximately
$450,000 at September 30, 2000. There are no assurances, however, that Meridian
will be able to recover all or some of those amounts.
Management is not aware of any other 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.
13
<PAGE> 16
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 2000.
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 2000 are incorporated
herein by reference. There are 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.
Meridian paid dividends of $0.22 per share, $0.20 per share, and $0.23 per share
in fiscal 1998, fiscal 1999, and fiscal 2000, respectively.
On November 16, 2000, the Board of Directors voted to increase the annual cash
dividend rate to $0.26 per share, an increase of 13%.
ITEM 6.
SELECTED FINANCIAL DATA
-----------------------
"Ten Year Summary" on page 26 of the Registrant's Annual Report to Shareholders
for 2000 is incorporated by reference.
14
<PAGE> 17
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 2000 is incorporated herein by reference.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The information required by Item 7A is incorporated by reference from the
discussion of "Market Risk Exposure" contained on page 13 of the Registrants
Annual Report to Shareholders for 2000.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
"Quarterly Financial Data" on page 25 of the Registrant's Annual Report to
Shareholders for 2000 along with the Consolidated Financial Statements of the
Registrant shown on pages 14 through 25 of its Annual Report to Shareholders for
2000, are incorporated herein by reference:
Consolidated Balance Sheets as of September 30, 2000 and 1999.
Consolidated Statements of Earnings for the years ended September 30, 2000,
1999 and 1998.
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the years ended September 30,
2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
The following schedules are filed herewith:
15
<PAGE> 18
<TABLE>
<CAPTION>
Schedule
No. Description Page
--- ----------- ----
<S> <C>
Report of Independent Public Accountants. 23
II. Valuation and Qualifying Accounts for the years ended
September 30, 2000, 1999 and 1998. 24
</TABLE>
All other supplemental schedules are omitted due to the absence of conditions
under which they are required or because the information is shown in the
Consolidated Financial Statements or Notes thereto.
ITEM 9.
DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
----------------------------------------------------
None.
PART III
Items 10., 11., 12., and 13. of Part III are incorporated by reference to the
Registrant's Proxy Statement for its 2001 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.
16
<PAGE> 19
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit Filing Status
-------------- ---------------------- -------------
<S> <C> <C>
3.1 Articles of Incorporation, including amendments A
3.2 Code of Regulations B
4 Indenture between Meridian and Star Bank, National C
Association, as Trustee, relating to Meridian's 7%
Convertible Subordinated Debentures due 2006
10.3 License Agreement dated October 6, 1983 with Marion B
Laboratories, Inc.
10.5 Sublicense Agreement dated June 17, 1993 among Johnson & D
Johnson, the Scripps Research Institute and Meridian
Concerning certain Patent Rights
10.6 Assignment dated June 17, 1993 from Ortho Diagnostic D
Systems Inc. to Meridian concerning certain Patent Rights
10.7 Agreement dated January 24, 1994 between Meridian E
Diagnostics, Inc. and Immulok, Inc.
10.8 Asset Purchase Agreement dated June 24, 1996 between F
Cambridge Biotech Corporation and Meridian Diagnostics,
Inc.
10.9 Merger Agreement among Gull Laboratories, Inc., Meridian G
Diagnostics, Inc. Fresenius AG and Meridian Acquisition
Co. dated as of September 15, 1998
10.10* Savings and Investment Plan, as amended H
10.11* Savings and Investment Plan Trust I
10.12* 1986 Stock Option Plan J
10.14* 1994 Directors' Stock Option Plan K
10.15* 1996 Stock Option Plan L
10.16* Salary Continuation Agreement for John A. Kraeutler M
10.17 First Amendment to Merger Agreement Among Gull N
Laboratories, Inc., Meridian Diagnostics
</TABLE>
17
<PAGE> 20
<TABLE>
<S> <C> <C>
Inc. Fresenius AG and Meridian Acquisition Co.
10.18* 1999 Directors' Stock Option Plan O
10.19* 1996 Stock Option Plan Amended and Restated Effective O
January 22, 1999
10.20 Dividend Reinvestment Plan Q
10.21 Merger Agreement dated September 13, 2000 among Meridian P
and the Shareholders of Viral Antigens, Inc.
13 2000 Annual Report to Shareholders Filed herewith(1)
21 Subsidiaries of the Registrant Filed herewith
23 Consent of Independent Public Accountants Filed herewith
27 Financial Data Schedule Filed herewith
99 Forward Looking Statements Statement Filed herewith
</TABLE>
--------
1 Only portions of the 2000 Annual Report to Shareholders specifically
incorporated by reference in this Form 10-K are filed herewith. A supplemental
paper copy of the 2000 Annual Report to Shareholders has been provided to the
Securities and Exchange Commission for informational purposes only.
18
<PAGE> 21
*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 Form 8-K filed with the Securities and Exchange Commission on
June 17, 1993.
E. Meridian's Forms 8-K filed with the Securities and Exchange Commission on
February 8, 1994 and April 6, 1994.
F. Meridian's Form 8-K filed with the Securities and Exchange Commission on
July 2, 1996.
G. Meridian's Form 8-K filed with the Securities and Exchange Commission on
September 17, 1998.
H. 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.
I. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended September
30, 1994.
J. Registration Statement No. 33-89214 on Form S-8 filed with the Securities
and Exchange Commission on April 5, 1995.
K. Registration Statement No. 33-78868 on Form S-8 filed with the Securities
and Exchange Commission on May 12, 1994.
L. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended September
30, 1996.
M. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended September
30, 1995.
N. Company's Report on Form 8-K filed with the Securities and Exchange
Commission filed on November 13, 1998.
19
<PAGE> 22
O. Meridian's Proxy Statement filed with the Securities and Exchange
Commission on December 21, 1998.
P. Meridian's Current Report on Form 8-K dated September 29, 2000.
Q. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended September
30, 1999.
(b) REPORTS ON FORM 8-K.
Meridian filed Reports on Form 8-K dated September 14, 2000 and September 29,
2000 related to the acquisition of all of the outstanding common stock of Viral
Antigens, Inc.
20
<PAGE> 23
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 22, 2000 William J. Motto
Chairman of the Board of
Directors and Chief Executive
Officer (Principal Executive Officer)
21
<PAGE> 24
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ William J. Motto Chairman of the Board of Directors and December 22, 2000
---------------------------------------- Chief Executive Officer (Principal
William J. Motto Executive Officer)
/s/ John A. Kraeutler President and Chief Operating December 22, 2000
---------------------------------------- Officer, Director
John A. Kraeutler
/s/ Melissa Lueke Corporate Controller December 22, 2000
---------------------------------------- (Acting Principal Accounting Officer)
Melissa Lueke
/s/ James A. Buzard Director December 22, 2000
----------------------------------------
James A. Buzard
/s/ Gary P. Kreider Director December 22, 2000
----------------------------------------
Gary P. Kreider
/s/ David C. Phillips Director December 22, 2000
----------------------------------------
David C. Phillips
/s/ Robert J. Ready Director December 22, 2000
----------------------------------------
Robert J. Ready
</TABLE>
22
<PAGE> 25
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, 2000. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in Item 8 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
November 16, 2000
23
<PAGE> 26
SCHEDULE II
Meridian Diagnostics, Inc.
and Subsidiaries
Valuation and Qualifying Accounts
(Amounts in Thousands)
Years Ended September 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Deductions Other(1) Period
----------- --------- -------- -------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Year Ended September 30, 2000:
------------------------------
Allowance for Doubtful Accounts $ 380 $ 122 $ - $ (45) $(19) $ 438
Inventory Reserves 1,013 568 - (806) (90) 685
Merger Integration Accounts 157 - - (157) - -
Year Ended September 30, 1999:
------------------------------
Allowance for Doubtful Accounts $ 171 $ 150 $ 7 $ (303) $355 $ 380
Inventory Reserves 857 667 - (1,242) 731 1,013
Merger Integration Accounts - 3,415 - (3,258) - 157
Year Ended September 30, 1998:
------------------------------
Allowance for Doubtful Accounts $ 166 $ 27 $ 7 $ (29) $ - $ 171
Inventory Reserves 416 1,029 - (588) - 857
</TABLE>
--------
1 Balances in fiscal 2000 reflect acquired valuation accounts related to the
Viral Antigens, Inc. acquisition ($5 for the allowance for doubtful accounts)
and the effects of currency translation. Balances in fiscal 1999 reflect the
acquired valuation accounts related to the Gull Laboratories, Inc. acquisition.
24
