8-K 1 l84033ae8-k.txt MERIDIAN DIAGNOSTICS, INC. FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): September 15, 2000 MERIDIAN DIAGNOSTICS, INC. --------------------------------------------------------------------- (Exact Name of Registrant as Specified in Charter) Ohio --------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation) 0-14902 31-0888197 ------------------------------- --------------------------------- (Commission File Number) (IRS Employer Identification Number) 3471 River Hills Drive Cincinnati, Ohio 45244 --------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (513) 271-3700 2 ITEM 2 ACQUISITION OR DISPOSITION OF ASSETS On September 15, 2000, Meridian Diagnostics, Inc. (the Company) acquired all of the outstanding common stock of Viral Antigens, Inc. (VAI) for $9 million in cash. The purchase agreement provides for additional consideration in the amount of $8.25 million, contingent upon VAI's future earnings through September 30, 2006. The acquisition will be accounted for as a purchase. The $9 million purchase price has been funded with bank debt from the Company's existing line of credit facility with Fifth Third Bank. VAI manufactures infectious disease antigens that are used in ELISA Assay, Latex Agglutination Assay and Immunofluorescence Assay diagnostic testing systems. VAI also manufactures and distributes a Pseudorabies Virus anti-body test kit for the veterinary market. ITEM 7 FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) Pro Forma Financial Information of Meridian Diagnostics, Inc. (Unaudited) Pro Forma Combined Condensed Balance Sheet at June 30, 2000 3 Pro Forma Combined Condensed Statement of Operations for the Nine-Month Period Ended June 30, 2000 5 Pro Forma Combined Condensed Statement of Operations for the Year Ended September 30, 1999 7 (b) Financial Statements of Viral Antigens, Inc. Independent Auditor's Report F-1 Balance Sheet as of October 31, 1999 F-2 Statement of Income for the Year Ended October 31, 1999 F-3 Statement of Stockholders' Equity for the Year Ended October 31, 1999 F-4 Statement of Cash Flows for the Year Ended October 31, 1999 F-5 Notes to Financial Statements F-7 Unaudited Condensed Balance Sheets at July 31, 2000 and October 31, 1999 F-13 Unaudited Condensed Statements of Income for the Three-Month and Nine-Month Periods Ended July 31, 2000 and 1999 F-14 Unaudited Condensed Statement of Stockholders' Equity for the Nine-Month Period Ended July 31, 2000 F-15 Unaudited Condensed Statements of Cash Flows for the Nine-Month Periods Ended July 31, 2000 and 1999 F-16 Notes to Unaudited Condensed Financial Statements F-18 (c) Exhibits Merger Agreement among Viral Antigens, Inc., Exhibit 10.21 Preston H. Dorsett, Karen C. Dorsett, Robert F. Naegele, Ronald W. Kim, Meridian Acquisition Company and Meridian Diagnostics, Inc. dated September 13, 2000 Earnout Agreement among Preston H. Dorsett, Exhibit 10.22 Karen C. Dorsett, Robert F. Naegele, Ronald W. Kim and Meridian Diagnostics, Inc. dated September 13, 2000 Consent of Independent Public Accountants Exhibit 23 Forward Looking Statements Exhibit 99 -1- 3 PRO FORMA FINANCIAL INFORMATION OF MERIDIAN DIAGNOSTICS, INC. (UNAUDITED) The Pro Forma Condensed Combined Balance Sheet of Meridian Diagnostics, Inc. (the Company) as of June 30, 2000 reflects the financial position of the Company after giving effect to the acquisition discussed in Item 2, as if such acquisition was effective June 30, 2000. The Pro Forma Condensed Combined Statements of Earnings for the Nine-Month Period Ended June 30, 2000 and the Year Ended September 30, 1999, assumes that the acquisition was effective October 1, 1998, and are based on the operations of the Company for those respective periods. The pro forma financial statements have been derived from the historical financial statements of the Company and Viral Antigens, Inc. The acquisition is being accounted for as a purchase, pursuant to which the purchase price is allocated to the assets acquired and liabilities assumed based on fair value. The pro forma financial statements included herein are not necessarily indicative of the future consolidated financial position or results of operations of the Company. Furthermore, the pro forma financial statements are not indicative of the consolidated financial position or results of operations of the Company that would have actually occurred had the transaction been in effect for the periods included herein because the acquisition and related purchase price were based on financial terms and conditions that existed on the acquisition date and not as of October 1, 1998. The allocation of the purchase price included herein is preliminary and based on estimates, pending the completion of a closing balance sheet audit and certain appraisals of assets acquired. These estimates may be revised at a later date based on completion of the closing balance sheet audit and certain appraisals of assets acquired. These estimates may differ substantially from the pro forma adjustments included herein. Furthermore, the final allocation of the purchase price may include an allocation to in-process research and development. No such allocation has been made in the pro forma adjustments included herein. The allocation of the purchase price included herein is based solely on the $9 million paid at closing, and excludes the effects of additional contingent consideration, if any, described in Item 2 herein. The pro forma financial statements included herein should be read in conjunction with the historical consolidated financial statements of the Company included in its Annual Report on Form 10-K/A for the Year Ended September 30, 1999. A summary of the purchase price allocation included in the pro forma financial statements follows (000's): Purchase price, including estimated transaction costs of $750 $9,750 ------------- Less fair value of assets acquired - Accounts receivable 917 Inventory 3,517 Property, plant and equipment 4,368 Other assets 532 ------------- 9,334 ------------- Plus fair value of liabilities assumed - Debt and capital lease obligations 1,439 Deferred tax liabilities 2,923 Other liabilities 122 ------------- 4,484 ------------- Intangible assets acquired, including goodwill $4,900 =============
-2- 4
MERIDIAN DIAGNOSTICS, INC. PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED) JUNE 30, 2000 (000'S) Viral Pro Forma Meridian (k) Antigens Adjustments Combined --------------------------------------------------------------- ASSETS Current Assets - Cash and investments $ 5,986 $ 433 $ (783) (a) $ 5,636 Accounts receivable - trade and other 14,293 925 (8) (b) 15,210 Inventories 11,638 2,317 1,200 (c) 15,155 Prepaid expenses and other 614 61 (75) (b) 600 Deferred income taxes 562 44 606 --------------------------------------------------------------- Total current assets 33,093 3,780 334 37,207 --------------------------------------------------------------- Property, Plant and Equipment, net 13,352 3,365 1,003 (d) 17,720 Other Assets - Long-term receivables and other 1,466 937 (917) (e) 1,486 Deferred debenture costs 821 - 821 Intangible assets, including goodwill 22,418 7 4,893 (f) 27,318 --------------------------------------------------------------- Total other assets 24,705 944 3,976 29,625 --------------------------------------------------------------- Total assets $ 71,150 $ 8,089 $ 5,313 $ 84,552 =============================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities - Current portion of long-term obligations $ 632 $ 148 $ 780 Accounts payable and accrued expenses 7,131 464 (83) (b) 7,512 Income taxes payable 1,404 39 (380) (g) 1,063 --------------------------------------------------------------- Total current liabilities 9,167 651 (463) 9,355 --------------------------------------------------------------- Long-term Debt and Capital Lease Obligations 24,304 1,291 9,000 (h) 34,595 Deferred Income Tax Liabilities 3,602 56 2,867 (i) 6,525 Shareholders' Equity - Common stock 2,529 1 (1) (j) 2,529 Additional paid-in capital 20,922 - 20,922 Cumulative currency translation (3,229) - (3,229) Retained earnings 13,855 6,210 (6,210) (j) 13,855 Treasury stock - (120) 120 (j) - --------------------------------------------------------------- Total shareholders' equity 34,077 6,091 (6,091) 34,077 --------------------------------------------------------------- $ 71,150 $ 8,089 $ 5,313 $ 84,552 ===============================================================
-3- 5 MERIDIAN DIAGNOSTICS, INC. NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED) June 30, 2000 (000's) (a) This adjustment is made to reduce cash and investments for the following: Payment of estimated transaction costs of Meridian $ (750) Payment of estimated transaction costs by VAI prior to closing (200) Payment of bonuses by VAI to its shareholders prior to closing (750) Collection of receivables due from VAI shareholders prior to closing 660 Collection of cash surrender value of VAI officer life insurance policies upon cancellation of such policies 257 -------------- $ (783) ==============
(b) This adjustment is made to eliminate intercompany receivables and payables. (c) This adjustment is made to state inventory acquired at estimated fair value. (d) This adjustment is made to state fixed assets acquired at estimated fair value. (e) This adjustment is made to eliminate receivables due from VAI shareholders ($660) and cash surrender value of VAI life insurance policies ($257), both settled prior to closing. (f) This adjustment is made to record estimated intangible assets acquired, including goodwill. (g) This adjustment is made to reduce income taxes payable for the tax effects of transaction costs paid by VAI and bonuses paid by VAI to its shareholders, both prior to closing. (h) This adjustment is made to record the debt obligation incurred to fund the purchase of VAI. (i) This adjustment is made to record deferred income tax liabilities related to temporary basis differences resulting from the application of purchase accounting. (j) These adjustments are made to eliminate VAI's shareholders' equity accounts. The adjustment to eliminate VAI's retained earnings excludes the effects of the expenses related to the payment of transaction costs by VAI prior to closing and the payment of bonuses by VAI to its shareholders prior to closing, because such expenses are unusual and non-recurring in nature. Such expenses have also been excluded from the accompanying Pro Forma Condensed Combined Statements of Earnings for the same reason. (k) Restated to reflect the correction of a book-keeping error which occurred in June 1999, related to sales to Meridian's German subsidiary. -4- 6
MERIDIAN DIAGNOSTICS, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS (UNAUDITED) NINE-MONTH PERIOD ENDED JUNE 30, 2000 (000'S EXCEPT PER SHARE DATA) Viral Pro Forma Meridian Antigens Adjustments Combined -------------------------------------------------------------------- Net Sales $ 43,246 $ 4,643 $ (20) (a) $ 47,869 Cost of Goods Sold 16,016 2,043 (13) (a) 18,046 -------------------------------------------------------------------- Gross profit 27,230 2,600 (7) 29,823 -------------------------------------------------------------------- Operating Expenses - Research and development 1,457 834 2,291 Selling and marketing 8,944 262 9,206 General and administrative 7,351 1,014 245 (b) 8,610 -------------------------------------------------------------------- Total operating expenses 17,752 2,110 245 20,107 -------------------------------------------------------------------- Operating income 9,478 490 (252) 9,716 Other Income (Expense) - Interest income 294 34 (30) (c) 298 Interest expense (1,543) (93) (540) (d) (2,176) Other, net 335 25 360 - -------------------------------------------------------------------- Total other income (expense) (914) (34) (570) (1,518) -------------------------------------------------------------------- Earnings (Loss) Before Income Taxes 8,564 456 (822) 8,198 Provision (Benefit) for Income Taxes 3,361 165 (311) (e) 3,215 -------------------------------------------------------------------- Net Earnings (Loss) $ 5,203 $ 291 $ (511) $ 4,983 ==================================================================== Basic Weighted Average Number of Common Shares Outstanding 14,525 14,525 Basic Earnings Per Share $ 0.36 $ 0.34 Diluted Weighted Average Number of Common Shares Outstanding 14,618 14,618 Diluted Earnings Per Share $ 0.36 $ 0.34
-5- 7 MERIDIAN DIAGNOSTICS, INC. NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS (UNAUDITED) NINE-MONTH PERIOD ENDED JUNE 30, 2000 (000'S) (a) These adjustments are made to eliminate sales of inventory from VAI to Meridian. (b) This adjustment is made to reflect the amortization of intangible assets acquired using a weighted average life of 15 years. (c) This adjustment is made to reduce interest income for the net reduction in cash and investments related to the items in Note (a) on page 4 herein. (d) This adjustment is made to increase interest expense for the cost related to the $9 million of acquisition funding debt, at an interest rate of 8%. A 0.125% adjustment to the interest rate would change interest expense by approximately $8. (e) This adjustment is made to reflect the following:
Incremental taxes that occur as a result of filing a consolidated federal tax return $ 17 Tax effect of pro forma adjustments (a) - (d) (328) ---------------- $ (311) ================
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MERIDIAN DIAGNOSTICS, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS (UNAUDITED) YEAR ENDED SEPTEMBER 30, 1999 (000'S EXCEPT PER SHARE DATA) Viral Pro Forma Meridian (f) Antigens Adjustments Combined -------------------------------------------------------------------- Net Sales $ 53,927 $ 5,318 $ (49) (a) $ 59,196 Cost of Goods Sold 19,558 2,116 (16) (a) 21,658 -------------------------------------------------------------------- Gross profit 34,369 3,202 (33) 37,538 -------------------------------------------------------------------- Operating Expenses - Research and development 1,986 1,116 3,102 Selling and marketing 11,172 308 11,480 General and administrative 9,769 1,341 326 (b) 11,436 Merger integration 3,415 - 3,415 Purchased in-process research and development 1,500 - 1,500 -------------------------------------------------------------------- Total operating expenses 27,842 2,765 326 30,933 -------------------------------------------------------------------- Operating income 6,527 437 (359) 6,605 Other Income (Expense) - Interest income 505 46 (40) (c) 511 Interest expense (2,143) (106) (720) (d) (2,969) Other, net (77) 66 (11) -------------------------------------------------------------------- Total other income (expense) (1,715) 6 (760) (2,469) -------------------------------------------------------------------- Earnings (Loss) Before Income Taxes 4,812 443 (1,119) 4,136 Provision (Benefit) for Income Taxes 2,739 156 (426) (e) 2,469 -------------------------------------------------------------------- Net Earnings (Loss) $ 2,073 $ 287 $ (693) $ 1,667 ==================================================================== Basic Weighted Average Number of Common Shares Outstanding 14,385 14,385 Basic Earnings Per Share $ 0.14 $ 0.12 Diluted Weighted Average Number of Common Shares Outstanding 14,580 14,580 Diluted Earnings Per Share $ 0.14 $ 0.11
-7- 9 MERIDIAN DIAGNOSTICS, INC. NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS (UNAUDITED) YEAR ENDED SEPTEMBER 30, 1999 (000'S) (a) These adjustments are made to eliminate sales of inventory from VAI to Meridian. (b) This adjustment is made to reflect the amortization of intangible assets acquired using a weighted average life of 15 years. (c) This adjustment is made to reduce interest income for the net reduction in cash and investments related to the items in Note (a) on page 4 herein. (d) This adjustment is made to increase interest expense for the cost related to the $9 million of acquisition funding debt, at an interest rate of 8%. A 0.125% adjustment to the interest rate would change interest expense by a approximately $11. (e) This adjustment is made to reflect the following: Incremental taxes that occur as a result of filing a consolidated federal tax return $ 21 Tax effect of pro forma adjustments (a) - (d) (447) ---------------- $ (426) ================
(f) Restated to reflect the correction of a book-keeping error which occurred in June 1999, related to sales to Meridian's German subsidiary. -8- 10 INDEPENDENT AUDITOR'S REPORT The Board of Directors Viral Antigens, Inc. Memphis, Tennessee We have audited the accompanying balance sheet of Viral Antigens, Inc. as of October 31, 1999, and the related statements of income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Viral Antigens, Inc. as of October 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. REYNOLDS, BONE & GRIESBECK PLC Memphis, Tennessee December 2, 1999 F-1 11 BALANCE SHEET Viral Antigens, Inc. October 31, 1999 -------------------------------------------------------------------------------- ASSETS Current assets Cash $ 26,303 Receivables Trade accounts 1,239,111 Officers, employees, and related interests 50,085 Inventories 2,198,402 Prepaid expenses 58,395 Investments - available-for-sale 149,044 Deferred income taxes 43,778 ----------------- Total current assets 3,765,118 Property, plant, and equipment, net of accumulated depreciation 2,872,035 Receivables from officers, employees, and related interests 618,429 Investments - available-for-sale 25,000 Cash value of life insurance 236,500 Other assets 5,000 ----------------- $ 7,522,082 ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current installments of long-term debt $ 91,064 Accounts payable 153,075 Income taxes 26,928 Accrued expenses 136,350 ----------------- Total current liabilities 407,417 Long-term debt, less current installments 1,194,012 Deferred income taxes 55,758 ----------------- 1,657,187 Stockholders' equity Common stock, Class A, no par value; 90,000 shares authorized and issued 1,000 Common stock, Class B, no par value; 10,000 shares authorized; no shares issued - Retained earnings 5,945,634 Accumulated other comprehensive income (1,740) ----------------- 5,944,894 Less 720 shares of treasury stock 79,999 ----------------- Total stockholders' equity 5,864,895 ----------------- $ 7,522,082 ================= See notes to financial statements. F-2 12 STATEMENT OF INCOME Viral Antigens, Inc. Year Ended October 31, 1999 -------------------------------------------------------------------------------- Sales $ 5,496,659 Cost of sales 2,261,043 ----------------- Gross profit 3,235,616 Operating expenses General and administrative 1,189,264 Shipping 38,890 Marketing 281,682 Research and development 1,043,815 ----------------- 2,553,651 ----------------- Operating income 681,965 Other income (expenses) Fees and commissions 9,000 Interest and dividend income 48,983 Interest expense (105,596) Gain on disposal of equipment 32,977 Loss on sale of investments - available-for-sale (409) Other 28,103 ----------------- 13,058 ----------------- Income before income taxes 695,023 Income taxes 252,522 ----------------- Net income $ 442,501 ================= See notes to financial statements. F-3 13 STATEMENT OF STOCKHOLDERS' EQUITY Viral Antigens, Inc. Year Ended October 31, 1999 --------------------------------------------------------------------------------
Accumulated Common Stock Other ------------------------- Retained Comprehensive Treasury Class A Class B Earnings Income Stock Total ------------------------- --------------- ---------------- ---------------------------- Balance at October 31, 1998 $1,000 $ - $ 5,503,133 $ (1,934) $ - $ 5,502,199 Comprehensive income Net income - - 442,501 - - 442,501 Net change in unrealized loss on investments - available-for-sale - - - 194 - 194 -------------- Total comprehensive income 442,695 Purchase of 720 shares of treasury stock - - - - (79,999) (79,999) Common stock, Class A stock dividend (see note 11 to the financial statements) - - - - - - ------------------------- --------------- ---------------- ------------- -------------- Balance at October 31, 1999 $1,000 $ - $ 5,945,634 $ (1,740) $(79,999) $ 5,864,895 ========================= =============== ================ ============= ==============
See notes to financial statements. F-4 14 STATEMENT OF CASH FLOWS Viral Antigens, Inc. Year Ended October 31, 1999 -------------------------------------------------------------------------------- Cash flows from operating activities Cash receipts Customers $ 5,654,716 Interest and dividend income 21,351 Fees and commissions 9,000 Other 21,958 ----------------- 5,707,025 Cash disbursements Material and supply costs (1,241,023) Employee related costs (2,726,163) Consultants and other professionals (80,158) Commissions and royalties (5,367) Income taxes, net (364,090) Nonemployee insurance (74,405) Repairs and maintenance (135,230) Nonemployee marketing costs (97,915) Interest expense (96,911) Other payments (277,018) ----------------- (5,098,280) ----------------- Cash provided by operating activities 608,745 ----------------- Cash flows from investing activities Purchases of property, plant, and equipment (707,708) Proceeds from sale of equipment 49,456 Purchases of investments - available-for-sale (68,672) Proceeds from sale of investments - available-for-sale 101,667 Collections on notes receivable 59,900 Advances to officers, employees, and related interests (133,571) ----------------- Cash used for investing activities (698,928) ----------------- Cash flows from financing activities Reduction of principal on long-term debt (113,738) Purchase of treasury stock (79,999) ----------------- Cash used for financing activities (193,737) ----------------- Net decrease in cash (283,920) Cash at beginning of year 310,223 ----------------- Cash at end of year $ 26,303 ================= Continued F-5 15 STATEMENT OF CASH FLOWS Viral Antigens, Inc. Year Ended October 31, 1999 -------------------------------------------------------------------------------- Indirect cash flow information: Operating activities Net income $ 442,501 Noncash adjustments Depreciation 247,686 Gain on disposal of equipment (32,977) Loss on sale of investments - available-for-sale 409 Deferred income taxes 3,627 Decrease in cash value of life insurance 5,162 Changes in operating assets and liabilities Receivables 31,048 Inventories (121,667) Prepaid expenses (1,177) Accounts payable 51,417 Income taxes (100,503) Accrued expenses 83,219 ----------------- Cash provided by operating activities $ 608,745 ================= See notes to financial statements. F-6 16 NOTES TO FINANCIAL STATEMENTS Viral Antigens, Inc. October 31, 1999 -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business and Other Matters Viral Antigens, Inc. (the Company) develops and manufactures diagnostic test kits and antigens utilized in the diagnosis of human and veterinary diseases. The customer base of the Company is worldwide. At October 31, 1999, the Company's funds on deposit with local banks were insured by an agency of the U. S. Government. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results may differ from those estimates. Accounts Receivable The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been established. If accounts become uncollectible, they will be charged to operations when that determination is made. Investments - Available-for-Sale Investments classified as available-for-sale are stated at estimated fair value. Fair values are determined by reference to current market quotations. Unrealized gains and losses on available-for-sale investments are reported as direct increases or decreases in other comprehensive income. Gains and losses on sale of available-for-sale securities are determined using the specific identification method. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value). Property, Plant, and Equipment Property, plant, and equipment are stated at cost less accumulated depreciation. Depreciation of plant and equipment is provided over the estimated useful lives of the respective assets using the straight-line method. Maintenance and repairs are charged to expense as incurred; major renewals and betterments are capitalized. When items of property, plant, or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the determination of net income. Continued F-7 17 NOTES TO FINANCIAL STATEMENTS Viral Antigens, Inc. October 31, 1999 -------------------------------------------------------------------------------- Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of current and deferred taxes. Deferred taxes are recognized for differences between the bases of assets and liabilities for financial statement and income tax purposes. The differences relate to inventories and property and equipment. Profit Sharing Plan The Company has a noncontributory profit sharing plan that covers all eligible employees. Contributions to the plan are at the discretion of the Board of Directors. Profit sharing plan expense for the year ended October 31, 1999 was $80,000. Cash Flows Cash on hand and cash on deposit are considered as cash for purposes of the statement of cash flows. 2. INVENTORIES A summary of inventories at October 31, 1999 follows: Raw materials $ 370,669 Work-in-process 1,277,798 Finished goods 549,935 ---------------- $ 2,198,402 ================ 3. INVESTMENTS - AVAILABLE-FOR-SALE The cost and estimated fair values of investments - available-for-sale at October 31, 1999 are as follows:
Gross Unrealized Gross Unrealized Estimated Cost Gains Losses Fair Value ------------------ ----------------- ----------------- ----------------- Mutual funds $ 150,784 $ 2,697 $ (4,437) $ 149,044 Common stock 25,000 - - 25,000 ------------------ ----------------- ----------------- ----------------- $ 175,784 $ 2,697 $ (4,437) $ 174,044 ================== ================= ================= =================
Continued F-8 18 NOTES TO FINANCIAL STATEMENTS Viral Antigens, Inc. October 31, 1999 -------------------------------------------------------------------------------- 4. PROPERTY, PLANT, AND EQUIPMENT A summary of property, plant, and equipment at October 31, 1999 follows: Land $ 116,019 Land improvements 20,213 Buildings 2,597,431 Laboratory equipment 2,070,304 Computer equipment 342,729 Transportation equipment 89,060 Furniture and fixtures 416,915 Construction in progress 109,856 ---------------- 5,762,527 Less accumulated depreciation 2,890,492 ---------------- $ 2,872,035 ================ 5. LONG-TERM DEBT A summary of long-term debt at October 31, 1999 follows: Note payable in monthly payments of $15,060, including interest at 7.75%, through December 2001 with the remaining principal balance of $1,078,650 due in January 2002; secured by property, plant, and equipment $ 1,285,076 Less current installments of long-term debt 91,064 ---------------- Long-term debt, less current installments $ 1,194,012 ================ Under the note payable agreements with the bank, the Company is required to limit loans to stockholders, officers, employees, and their families to a specified amount, and maintain a specified debt to net worth ratio; minimum working capital; minimum net worth, as defined; and minimum funds flow coverage, as defined. The long-term debt installments for each of the years following October 31, 1999 are: 2000 - $91,064; 2001 - $91,390; and 2002 - $1,102,622. Continued F-9 19 NOTES TO FINANCIAL STATEMENTS Viral Antigens, Inc. October 31, 1999 -------------------------------------------------------------------------------- 6. LINE OF CREDIT The Company has a $600,000 line of credit with a bank at October 31, 1999. There are no borrowings against the line at October 31, 1999. Borrowings under this line of credit are secured by certain accounts receivable and inventories and bear interest at a variable rate. 7. ACCRUED EXPENSES A summary of accrued expenses at October 31, 1999 follows: Payroll and related taxes $ 125,376 Interest payable 8,592 Other 2,382 ---------------- $ 136,350 ================ 8. INCOME TAXES The components of income tax expense for the year ended October 31, 1999 follow: Federal Current $ 210,267 Deferred 3,054 State Current 38,628 Deferred 573 ---------------- $ 252,522 ================ Continued F-10 20 NOTES TO FINANCIAL STATEMENTS Viral Antigens, Inc. October 31, 1999 -------------------------------------------------------------------------------- Total income tax expense was $252,522 for the year ended October 31, 1999 (an effective tax rate of 36.3%), which is more than income tax expense computed by applying the United States federal corporate income tax rate of 34% to income before income taxes. The reasons for this difference are as follows:
Percent of Pretax Amount Income ----------------- ---------------- Computed "expected" income tax expense $ 236,308 34.0% State income tax, net of federal income tax benefit 25,873 3.7 Research and development income tax credit (12,791) (1.9) Nondeductible meals and entertainment expenses 3,336 0.5 Other (204) - ----------------- ---------------- Actual income tax expense $ 252,522 36.3% ================= ================ Deferred income tax expense results from temporary differences between the bases of assets and liabilities for financial statement and income tax purposes. The sources of these differences for the year ended October 31, 1999 and the tax effect of each are as follows: Excess of tax over book inventories $ (6,565) Excess of tax over book depreciation 10,192 ---------------- $ 3,627 ================ Information on the deferred income tax balance sheet accounts at October 31, 1999 follows: Noncurrent deferred tax asset $ 3,800 Less valuation allowance (3,800) ---------------- - Current deferred tax asset 43,778 Noncurrent deferred tax liability (55,758) ---------------- Net deferred tax liability $ (11,980) ================
At October 31, 1999, the Company has a capital loss carryforward of $10,000 for federal income tax purposes. The capital loss carryforward will expire, if not used, on October 31, 2001. The estimated income tax benefits from the capital loss carryforward have been fully reserved at October 31, 1999 and are not reflected in the accompanying financial statements. The valuation allowance for the capital loss carryforward did not change during the year ended October 31, 1999. Continued F-11 21 NOTES TO FINANCIAL STATEMENTS Viral Antigens, Inc. October 31, 1999 -------------------------------------------------------------------------------- 9. RELATED PARTIES Receivables from officers, employees, and related interests relate principally to interest bearing unsecured notes receivable and related accrued interest receivable. Interest income during the year ended October 31, 1999 on receivables from officers, employees, and related interests was $28,306. The Company is affiliated with another corporation through common ownership. Fee revenue of $9,000 was generated from charges to this affiliate during the year ended October 31, 1999 for services performed. At October 31, 1999, an account receivable of $60 was due from such affiliate for allocated operating and other costs. 10. MAJOR CUSTOMERS During the year ended October 31, 1999, the following customers provided more than 10% of the Company's gross revenue: Customer 1 48.37% 2 14.33% 11. COMMON STOCK The Board of Directors increased the number of authorized common stock on August 23, 1999 as follows: Shares Authorized ----------------------------------------- From To ----------------- ---------------- Common Stock, Class A 900 90,000 Common Stock, Class B 100 10,000 On August 23, 1999, the Company declared a stock dividend to holders of the Company's Class A common stock. This dividend resulted in an additional 89,100 shares of Class A common stock being issued. Because the Company is a closely held corporation, the stock dividend is treated in a manner consistent with a stock split. F-12 22 CONDENSED BALANCE SHEETS (UNAUDITED) Viral Antigens, Inc. July 31, 2000 and October 31, 1999
------------------------------------------------------------------------------------------------------------------- July 31, 2000 October 31, 1999 -------------------- --------------------- ASSETS Current assets Cash $ 136,751 $ 26,303 Receivables Trade accounts 1,330,394 1,239,111 Officers, employees, and related interests 488,568 50,085 Inventories 2,327,603 2,198,402 Prepaid expenses 82,828 58,395 Investments - available-for-sale 74,044 149,044 Deferred income taxes 43,778 43,778 -------------------- --------------------- Total current assets 4,483,966 3,765,118 Property, plant, and equipment, net of accumulated depreciation 3,366,400 2,872,035 Receivables from officers, employees, and related interests 190,687 618,429 Investments - available-for-sale 1 25,000 Cash value of life insurance 262,463 236,500 Other assets 6,250 5,000 -------------------- --------------------- $ 8,309,767 $ 7,522,082 ==================== ===================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current installments of long-term debt $ 149,354 $ 91,064 Note payable to bank 100,000 - Accounts payable 304,519 153,075 Income taxes 78,120 26,928 Accrued expenses 95,084 136,350 -------------------- --------------------- Total current liabilities 727,077 407,417 Long-term debt, less current installments 1,278,431 1,194,012 Deferred income taxes 55,758 55,758 -------------------- --------------------- 2,061,266 1,657,187 Stockholders' equity Common stock, Class A, no par value; 90,000 shares authorized and issued 1,000 1,000 Common stock, Class B, no par value; 10,000 shares authorized; no shares issued - - Retained earnings 6,369,240 5,945,634 Accumulated other comprehensive income (1,740) (1,740) -------------------- --------------------- 6,368,500 5,944,894 Less shares of treasury stock (1,080 in 2000 and 720 in 1999) 119,999 79,999 -------------------- --------------------- Total stockholders' equity 6,248,501 5,864,895 -------------------- --------------------- $ 8,309,767 $ 7,522,082 ==================== =====================
See notes to financial statements. F-13 23 CONDENSED STATEMENTS OF INCOME (UNAUDITED) Viral Antigens, Inc. Three Months and Nine Months Ended July 31, 2000 and 1999 --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended July 31, July 31, ---------------------------------- --------------------------------- 2000 1999 2000 1999 ---------------- ---------------- --------------- --------------- Sales $ 1,997,711 $ 1,463,035 $ 4,491,570 $ 3,723,690 Cost of sales 806,458 526,407 1,865,159 1,481,222 ---------------- ---------------- --------------- --------------- Gross profit 1,191,253 936,628 2,626,411 2,242,468 Operating expenses General and administrative 297,806 251,996 862,640 798,882 Shipping 13,125 12,651 27,693 26,852 Marketing 74,961 63,135 219,223 202,262 Research and development 263,609 302,386 786,484 756,382 ---------------- ---------------- --------------- --------------- 649,501 630,168 1,896,040 1,784,378 ---------------- ---------------- --------------- --------------- Operating income 541,752 306,460 730,371 458,090 Other income (expenses) Fees and commissions - 3,000 15,479 9,000 Interest and dividend income 9,351 9,932 25,716 31,489 Interest expense (31,168) (26,090) (95,513) (79,814) Gain on disposal of equipment - - - 32,977 Loss on investments - available-for-sale - - (24,999) - Other 22,646 3,786 31,672 17,111 ---------------- ---------------- --------------- --------------- 829 (9,372) (47,645) 10,763 ---------------- ---------------- --------------- --------------- Income before income taxes 542,581 297,088 682,726 468,853 Income taxes 207,500 112,810 259,120 177,669 ---------------- ---------------- --------------- --------------- Net income $ 335,081 $ 184,278 $ 423,606 $ 291,184 ================ ================ =============== ===============
See notes to financial statements. F-14 24 CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) Viral Antigens, Inc. Nine Months Ended July 31, 2000 --------------------------------------------------------------------------------
Accumulated Common Stock Other ------------------------- Retained Comprehensive Treasury Class A Class B Earnings Income Stock Total ------------ ------------ --------------------------------------------------------------- Balance at October 31, 1999 $1,000 $ - $ 5,945,634 $ (1,740) $(79,999) $ 5,864,895 Comprehensive income Net income - - 423,606 - - 423,606 Net change in unrealized loss on investments - available-for-sale - - - - - - -------------- Total comprehensive income 423,606 Purchase of 360 shares of treasury stock - - - - (40,000) (40,000) ------------ ------------ ---------------- ---------------- -------------- -------------- Balance at July 31, 2000 $1,000 $ - $ 6,369,240 $ (1,740) $(119,999) $ 6,248,501 ============ ============ ===============================================================
See notes to financial statements. F-15 25 CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Viral Antigens, Inc. Nine Months Ended July 31, 2000 and 1999 --------------------------------------------------------------------------------
Nine Months Ended -------------------------------------- July 31, 2000 July 31, 1999 ------------------ ----------------- Cash flows from operating activities Cash receipts Customers $ 4,400,333 $ 4,201,174 Interest and dividend income 6,557 9,861 Fees and commissions 15,479 9,000 Other 21,107 2,025 ------------------ ----------------- 4,443,476 4,222,060 Cash disbursements Material and supply costs (960,007) (977,865) Employee related costs (2,067,867) (1,908,325) Consultants and other professionals (123,506) (63,445) Commissions and royalties (1,391) (3,360) Income taxes, net (207,928) (302,090) Nonemployee insurance (88,376) (91,078) Repairs and maintenance (111,676) (91,228) Nonemployee marketing costs (46,367) (48,226) Interest expense (95,512) (79,899) Other payments (269,422) (230,554) ------------------ ----------------- (3,972,052) (3,796,070) ------------------ ----------------- Cash provided by operating activities 471,424 425,990 ------------------ ----------------- Cash flows from investing activities Purchases of property, plant, and equipment (653,376) (414,129) Proceeds from sale of equipment - 49,457 Purchases of investments - available-for-sale (45,000) (45,000) Proceeds from sale of investments - available-for-sale 120,000 100,000 Collections on notes receivable 9,223 32,553 Advances to officers, employees, and related interests (1,000) (133,571) ------------------ ----------------- Cash used for investing activities (570,153) (410,690) ------------------ ----------------- Cash flows from financing activities Long-term debt borrowings 250,000 - Reduction of principal on long-term debt (100,823) (100,628) Net increase in note payable to bank 100,000 35,479 Purchase of treasury stock (40,000) - ------------------ ----------------- Cash provided by (used for) financing activities 209,177 (65,149) ------------------ ----------------- Net increase (decrease) in cash 110,448 (49,849) Cash at beginning of period 26,303 310,223 ------------------ ----------------- Cash at end of period $ 136,751 $ 260,374 ================== =================
Continued F-16 26 CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Viral Antigens, Inc. Nine Months Ended July 31, 2000 and 1999 --------------------------------------------------------------------------------
Nine Months Ended -------------------------------------- July 31, 2000 July 31, 1999 ------------------ ----------------- Indirect cash flow information: Operating activities Net income $ 423,606 $ 291,184 Noncash adjustments Depreciation 219,154 188,141 Gain on disposal of equipment - (32,977) Loss on investments - available-for-sale 24,999 - Increase in cash value of life insurance (25,963) (26,487) Changes in operating assets and liabilities Receivables (110,247) 294,942 Inventories (129,201) (207,499) Prepaid expenses (25,683) (16,595) Accounts payable 84,833 54,053 Income taxes 51,192 (124,421) Accrued expenses (41,266) 5,649 ------------------ ----------------- Cash provided by operating activities $ 471,424 $ 425,990 ================== =================
See notes to financial statements. F-17 27 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Viral Antigens, Inc. July 31, 2000 -------------------------------------------------------------------------------- 1. BASIS FOR PRESENTATION The financial statements included herein have not been audited 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 disclosures 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 Viral Antigens, Inc. (the Company) believes that the disclosures included in these financial statements are adequate to make the information not misleading. It is suggested that these financial statements be read in conjunction with the Company's October 31, 1999 financial statements. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year. 2. INVENTORIES A summary of inventories at July 31, 2000 and October 31, 1999 follows: July 31, October 31, 2000 1999 ----------------- ---------------- Raw materials $ 445,805 $ 370,669 Work-in-process 1,641,730 1,277,798 Finished goods 240,068 549,935 ----------------- ---------------- $ 2,327,603 $ 2,198,402 ================= ================ Continued F-18 28 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Viral Antigens, Inc. July 31, 2000 -------------------------------------------------------------------------------- 3. PROPERTY, PLANT, AND EQUIPMENT A summary of property, plant, and equipment at July 31, 2000 and October 31, 1999 follows:
July 31, October 31, 2000 1999 ----------------- ---------------- Land $ 116,019 $ 116,019 Land improvements 20,213 20,213 Buildings 3,143,967 2,597,431 Laboratory equipment 2,308,547 2,070,304 Computer equipment 360,956 342,729 Transportation equipment 89,060 89,060 Furniture and fixtures 421,343 416,915 Construction in progress - 109,856 ----------------- ---------------- 6,460,105 5,762,527 Less accumulated depreciation 3,093,705 2,890,492 ----------------- ---------------- $ 3,366,400 $ 2,872,035 ================= ================
4. INCOME TAXES The provisions for income taxes were computed at the estimated annualized effective tax rates utilizing current tax law in effect. 5. COMPREHENSIVE INCOME Comprehensive income is the total of net income and all other non-owner changes in equity. Information on total comprehensive income is presented on the Company's statement of stockholders' equity included herein. F-19 29 SIGNATURES 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 hereto duly authorized. MERIDIAN DIAGNOSTICS, INC. Dated: September 29, 2000 By: /s/ Melissa Lueke ------------------------- Melissa Lueke Corporate Controller (Acting Principal Accounting Officer)