-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DcO8SvtIZXcKGEwoz2L325ZO89eM2QIQ2Y1ucjRCE+PiAC+LMYwu3AHqL/WBJcZ/ HMT3FDKwW3q1qwlW1qERUQ== 0000892251-99-000131.txt : 19990518 0000892251-99-000131.hdr.sgml : 19990518 ACCESSION NUMBER: 0000892251-99-000131 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERIDIAN DIAGNOSTICS INC CENTRAL INDEX KEY: 0000794172 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 310888197 STATE OF INCORPORATION: OH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14902 FILM NUMBER: 99626996 BUSINESS ADDRESS: STREET 1: 3471 RIVER HILLS DR CITY: CINCINNATI STATE: OH ZIP: 45244 BUSINESS PHONE: 5132713700 MAIL ADDRESS: STREET 1: 3471 RIVER HILLS DRIVE CITY: CINCINNATI STATE: OH ZIP: 45244 10-Q 1 FORM 10-Q FOR MERIDIAN DIAGNOSTICS, INC. 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 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 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 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 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 MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES Consolidated Statement of Shareholders' Equity For the Six Months Ended March 31, 1999 (Unaudited) ($000)
Number of Accumulated Shares Additional Other Issued and Comprehensive Common Paid in Comprehensive Retained Outstanding Income Stock Capital Income(Loss) Earnings Total ----------- ------------- ------- --------- ------------ -------- ---------- 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 ========== ====== ======= ====== ======= =======
Page 6 of 22 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 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 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 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
QUARTER ENDED ----------------------------------------------------------------------------- March 31, 1999 March 31, 1998 ------------------------------------- -------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------ --------- ----------- ------------- ---------- 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 =============================================================================================
Page 11 of 22
SIX MONTHS ENDED ----------------------------------------------------------------------------- March 31, 1999 March 31, 1998 ------------------------------------- -------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------ --------- ----------- ------------- ---------- 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 =============================================================================================
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 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 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 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 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 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 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 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 EX-27 2 FDS -- MERIDIAN DIANGOSTICS, INC.
5 1000 6-MOS SEP-30-1999 OCT-01-1998 MAR-31-1999 6,508 2,723 12,497 400 9,821 33,280 22,992 8,134 70,172 13,736 21,724 0 0 2,398 32,314 70,172 26,373 26,373 9,665 9,665 12,513 0 1,292 3,131 1,327 1,804 0 0 0 1,804 14,383 14,579
EX-99 3 FORWARD LOOKING STATEMENT 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 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 -----END PRIVACY-ENHANCED MESSAGE-----