-----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, U5X9QKeGg07TPlq/94CRxuXkTIA6XtkFKof54/HcKZJHUeDWQprmiMm1dObypzUr qQV0IF9Tp3EnTJZLoPAH8A== 0000950152-95-003045.txt : 19951226 0000950152-95-003045.hdr.sgml : 19951226 ACCESSION NUMBER: 0000950152-95-003045 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951222 SROS: NONE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14902 FILM NUMBER: 95604015 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-K 1 MERIDIAN DIAGNOSTICS 10-K 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, 1995. / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . ---------- ----------- Commission File No. 0-14902 MERIDIAN DIAGNOSTICS, INC. Incorporated under 3471 River Hills Drive IRS Employer ID the Laws of Ohio Cincinnati, Ohio 45244 No. 31-0888197 Phone: (513) 271-3700 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, No Par Value 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 $72,395,280 based on a closing sale price of $11.25 per share on December 14, 1995. As of December 14, 1995, 14,244,624 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 1995 furnished to the Commission pursuant to Rule 14a-3(b) and portions of the Registrant's Proxy Statement filed with the Commission for its 1996 Annual Meeting are incorporated by reference in Parts I, II and III as specified. - 1 - 2 MERIDIAN DIAGNOSTICS, INC. INDEX TO ANNUAL REPORT ON FORM 10-K
Page ---- Part I Item 1 - Business 3 Item 2 - Properties 7 Item 3 - Legal Proceedings 8 Item 4 - Submission of Matters to a Vote of Security Holders 8 Part II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6 - Selected Financial Data 10 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8 - Financial Statements and Supplementary Data 10 Item 9 - Disagreements on Accounting and Financial Disclosure 11 Part III Item 10 - Directors and Executive Officers of the Registrant 11 Item 11 - Executive Compensation 11 Item 12 - Security Ownership of Certain Beneficial Owners and Management 11 Item 13 - Certain Relationships and Related Transactions 11 Part IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 11
- 2 - 3 PART I. ITEM 1. BUSINESS "What We Do" and "Who We Are" on the inside front cover, "Letter to Shareholders" beginning on Page 2, "The Value of Medical Diagnostics" beginning on Page 4, "How We Create Value" beginning on Page 6, and the Consolidated Financial Statements beginning on Page 15 of the Registrant's Annual Report to Shareholders for 1995 are incorporated herein by reference. Information regarding research and development, sales and marketing, competition and patents, government regulations and employees is described below. Meridian Diagnostics, Inc. (the "Company" or "Meridian") develops, manufactures and markets a diverse line of disposable immunodiagnostic test kits used for the rapid diagnosis of infectious diseases. The Company's product development strategy is to combine existing technologies with new product designs both through internal product development and product acquisitions and licensing. To meet market demands, Meridian's products provide accuracy, simplicity, and speed, leading to opportunities for improvements in diagnosis and reductions in health care costs. All of the Company's products are used in procedures performed outside the body and require little or no special instrumentation or equipment. Through domestic and Italian direct sales forces, supplemented by a network of national and international distributors, the Company markets approximately 100 products, comprising 10 product lines, to the various market segments in which it competes. International sales in over 46 countries comprised approximately 23% of total fiscal 1995 sales. Research and Development Meridian focuses its research and development activities on enhancements to, and new applications for, its technologies where such developments can simplify, accelerate or increase the accuracy of the diagnosis of certain infectious diseases for each of the Company's market segments. Over the past eight years, Meridian has developed internally 32 new products. The Company seeks to design products that match a particular disease state to a diagnostic solution that provides a high level of sensitivity and specificity. The Company utilizes a variety of proprietary and public domain technologies for the production of highly specific, purified antigen preparations. These antigens are derived from suspensions of bacteria, viruses, fungi, rickettsia or certain biochemicals from which specific proteins or complex carbohydrates are separated. - 3 - 4 The research and development department is comprised of the Vice President of Research and Development and 15 research scientists. The disciplines represented in the group include biochemistry, immunology, mycology, bacteriology, virology and parasitology. In fiscal 1993, 1994, and 1995, the Company spent $1,165,000, $1,433,000, and $1,432,000, respectively, on its research and development activities. Sales and Marketing The principal customers for the Company's products are hospitals, commercial reference laboratories and alternate sites such as physicians' offices, outpatient clinics, HMOs and nursing homes. No end-use customer comprised more than 5% of the Company's sales in fiscal 1995. Two distributors together accounted for approximately 34% of the Company's fiscal 1995 sales. However, the Company does not believe that the loss of either of these distributors would have a material adverse effect on the Company because of its ability to sell to the end-use customers served by these distributors through alternative means. The Company markets products through domestic and Italian direct sales forces and a national and international network of independent distributors. The Company currently has 46 independent distributors outside the United States. The Company's direct sales force consists of a Director of Sales, two regional managers and 16 technical sales representatives in the United States. Marketing to physicians requires different approaches than selling to hospitals and clinical and reference laboratories. The Company has formed relationships with a significant number of independent physicians' office laboratory distributors. To aid the Company in its efforts to penetrate the physician market, the Company has entered into a distribution agreement with Biostar, Inc. for the direct marketing of Filtracheck-UTI, its one minute urinary tract infection test, to physicians' office laboratories. The Company's sales and marketing efforts for Europe, North Africa, the Middle East and select Pacific Rim countries are managed through Meridian Diagnostics Europe's ("MDE's") headquarters in Milan, Italy. MDE's strategy has been to appoint one or two distributors in each of the countries in its targeted markets. MDE currently has distributors in the key markets in Africa, the Middle East, the Pacific Rim and Europe, including Germany, France, Great Britain and Spain. During 1993, as part of its strategy to expand sales in Europe, Africa and the Middle East, the Company replaced its distribution arrangement in Italy with its own direct marketing force, opened a new marketing and distribution facility in Milan, Italy, and added new distributors in several European countries. - 4 - 5 During 1993, Meridian laid the groundwork for developing sales and marketing efforts in the Pacific Rim, Central and South America, and Southeast Europe with the addition of new distributors in China, Thailand, Australia, Singapore, Hong Kong, Chile, Argentina, Venezuela, Mexico and Turkey. Competition and Patents The market for diagnostic tests is a multi-billion dollar international industry which is highly competitive. Many of the Company's competitors are larger and have greater financial, research, manufacturing, and marketing resources. Important competitive factors for the Company'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 the Company's product lines do not reflect technological advances, the Company'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. A few large corporations produce a wide variety of diagnostic test and other medical devices and equipment, a larger number of mid-size companies generally compete only in the diagnostic industry and finally, a vast number of small companies produce only a few diagnostic products. Among the companies with which Meridian competes in the marketing of one or more of its products are Abbott Laboratories Inc., Becton Dickinson & Company, Diagnostic Products Corporation, Hybritech Incorporated, a subsidiary of Beckman Instruments, BioWhittaker, Inc., and Microscan, a division of Bain Capital. The Company markets approximately 100 products, comprising 10 product lines, to the various market segments in which it competes. At various times, particular test formats, tests for specific diseases or conditions, or certain diagnostic processes and products represent an important component of sales and profits for the Company. Currently, the most important product lines from the perspective of sales are C. difficile, fungal serology, mononucleosis and Para-Pak. In general, the Company does not seek patent protection for its products and instead strives to maintain the confidentiality of its proprietary know-how. In the absence of patent protection, the Company may be vulnerable to competitors who successfully imitate the Company's production and manufacturing techniques and processes. All of Meridian's personnel are required to execute - 5 - 6 confidentiality agreements designed to protect the Company's proprietary products. Government Regulation Because the Company's products are deemed to be "medical devices", the products are subject to regulation by the FDA as well as state agencies and foreign regulatory authorities. The Company's diagnostic tests and other clinical products intended for use as human diagnostics are generally subject to certain clearance procedures administered by the FDA. In the diagnostic product field, most approvals are processed through FDA procedures for "substantially equivalent" applications. This process allows sales to be made after the filing of an application and upon acknowledgment by the FDA, typically within six months 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. All of the Company's currently marketed diagnostic tests have been approved under the "substantially equivalent" application process and the Company anticipates that future products will be similarly submitted. If there are no existing FDA-approved products or processes comparable to a diagnostic product or process, approval by the FDA involves more lengthy procedures. The 1992 Medical Device Amendments to the Food, Drug and Cosmetics Act and the regulations promulgated thereunder require the Company to register with the FDA and to adhere to certain "Good Manufacturing Practices" which mandate detailed record-keeping procedures and also provide for periodic inspection of laboratory facilities by the FDA. The Clinical Laboratory Improvement Act of 1988 ("CLIA 88") prohibits laboratories from performing tests on human specimens 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 ("HHS") applicable to the category of examination or procedure performed. Regulations under CLIA 88 require that these laboratories meet performance requirements based on test complexity and other risk factors. Laboratories which perform tests that HHS determines to be simple would be eligible for a waiver from the certification requirements. Section 6141 of the Omnibus Budget Reconciliation Act of 1989 further provides that only laboratories in compliance with CLIA 88 will be eligible for reimbursement in the Medicare and Medicaid programs. The Company believes that CLIA 88 has not and will not have a significant impact on its business. - 6 - 7 Sales of the Company's products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. To a large extent, the Company relies on its foreign independent distributors to obtain any foreign approvals necessary to sell the Company's products in the countries which comprise the distributors' territories. The Company is an 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. The Company 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 November 3, 1995, Meridian had 159 full-time employees, 66 of whom hold scientific degrees. The Company maintains a Savings and Investment Plan (profit sharing and 401(k)) for its U.S. employees and has established Stock Option Plans for its officers, directors and employees. None of Meridian's employees are covered by collective bargaining agreements. The Company has never experienced any work stoppages and considers its relationship with its employees to be excellent. ITEM 2. PROPERTIES The Company's corporate offices, manufacturing facility, research and development facility, and warehouse are located in two buildings totalling 75,000 square feet located on 4.1 acres of land in a suburb of Cincinnati. This 75,000 square feet includes 19,000 square feet of office and manufacturing space completed in September 1995 at a cost of $1,400,000. These properties are owned by the Company, and the Company believes that all of its facilities are in good condition, well-maintained and suitable for its long-term needs. The Company believes its manufacturing and laboratory facilities are in compliance with all applicable rules and regulations and are maintained in a manner consistent with "Good Manufacturing Practices." MDE conducts its operations in the Milan, Italy area in a two-story building consisting of approximately 18,000 square feet. This facility is owned by MDE and was constructed at a cost of approximately $1,300,000. The Company believes these facilities are in good condition, well-maintained, and suitable for MDE's long-term operations. - 7 - 8 ITEM 3. LEGAL PROCEEDINGS Meridian is a defendant in a civil action filed by Delta Biologicals, srl ("Delta") against Inova Diagnostics, Inc. ("Inova") and Meridian in the Circuit Court of the Eleventh Judicial Circuit, Dade County, Florida, Case No. 95-12955, in June 1995. In July 1995, the case was removed to the United States District Court for the Southern District of Florida, Miami Division and assigned Case No. 95-1604-CIV. The action by Delta, an Italian corporation, alleges that Meridian deliberately and knowingly interfered with Delta's contractual relations with Inova with respect to Delta's exclusive right to import, market and sell in Italy, Spain, France and Portugal products manufactured by Inova. Specifically, Delta alleges that Inova has breached that contract by entering into a contract with, and selling products to, Meridian which Meridian, through MDE, is selling in Italy. Delta seeks judgment against Meridian for both compensatory and punitive damages of unspecified amounts in excess of $15,000. Both Meridian and Inova have filed answers denying liability. In addition to denying liability, Meridian has demanded that Inova, pursuant to a written agreement between Meridian and Inova, defend and indemnify Meridian against Delta's claims. Though the litigation is in its early stages and management is not able to opine on its merits or possible outcome, management believes, based upon its knowledge of the facts and upon the opinion of outside counsel, that Meridian has meritorious defenses and that Inova is obligated to defend and indemnify Meridian. Accordingly, management believes that the ultimate resolution of the pending litigation will not have a material adverse effect on Meridian's financial condition, results of operations or cash flows. Management is not aware of any other pending or threatened litigation, claims or assessments, asserted or unasserted, against Meridian. 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 1995. - 8 - 9 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS "Common Stock Information" on the inside rear cover and "Quarterly Financial Data" on page 24 of the Registrant's Annual Report to Shareholders for 1995 are incorporated herein by reference. There are currently no restrictions on cash dividend payments. The Board declared and paid a dividend of $0.0200 per share for each quarter of fiscal 1994. On November 16, 1994, the Board declared a 3% stock dividend for fiscal 1994, payable December 8, 1994 to shareholders of record on November 28, 1994. The Company paid cash in lieu of fractional shares based on the average of the closing sale prices during the ten trading days prior to November 28, 1994. The fiscal 1994 quarterly dividend per share amount was adjusted for the 3% stock dividend paid December 8, 1994 to holders of record on November 28, 1994. The Board declared and paid a dividend of $0.0267 per share for each quarter of fiscal 1995. On September 12, 1995, the Board declared a three-for-two stock split payable October 2, 1995 to holders of record at the close of business on September 22, 1995. The Company paid cash in lieu of fractional shares based on the average of the closing sale prices during the ten trading days prior to September 22, 1995. On November 14, 1995, the Board also declared a special fiscal 1995 year-end dividend of $0.025 per share, payable December 1, 1995 to shareholders of record on November 24, 1995. The fiscal 1995 quarterly dividend per share amount and the special fiscal 1995 year-end dividend per share amount were adjusted for the three-for-two stock split payable October 2, 1995 to shareholders of record on September 22, 1995. Also, on November 14, 1995, the Board approved an increase in the regular quarterly dividend rate from $0.0267 to $0.035 per share. - 9 - 10 ITEM 6. SELECTED FINANCIAL DATA "Selected Financial Data" on page 1 of the Registrant's Annual Report to Shareholders for 1995 is incorporated herein by reference. 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 12 of the Registrant's Annual Report to Shareholders for 1995 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The "Quarterly Financial Data" on page 24 of the Registrant's Annual Report along with the Consolidated Financial Statements of the Registrant shown on pages 14 through 24 of its Annual Report to Shareholders for 1995, are incorporated herein by reference: Report of Independent Public Accountants. Consolidated Balance Sheets as of September 30, 1995 and 1994. Consolidated Statements of Earnings for the years ended September 30, 1995, 1994 and 1993. Consolidated Statements of Shareholders' Equity for the years ended September 30, 1995, 1994 and 1993. Consolidated Statements of Cash Flows for the years ended September 30, 1995, 1994 and 1993. Notes to Consolidated Financial Statements. The following schedules are filed herewith:
Schedule No. Description Page - -------- ----------- ---- Report of Independent Public Accountants. 15
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Schedule No. Description Page - -------- ----------- ---- II. Valuation and Qualifying Accounts for the years ended September 30,1995, 1994 and 1993. 16
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 1996 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 the Company. (a) (3) EXHIBITS.
Exhibit Number Description of Exhibit Filing Status - -------------- ---------------------- ------------- 3 Articles of Incorporation and a Code of Regulations 4 Indenture between the Company c and Star Bank, National Association, as Trustee, relating to the Company's Convertible Subordinated Debentures 10.1 First Refusal Agreement a
- 11 - 12
Exhibit Number Description of Exhibit Filing Status - -------------- ---------------------- ------------- 10.2 Amendment to the First d Refusal Agreement 10.3 License Agreement dated a October 6, 1983 with Marion Laboratories, Inc. 10.5 Sublicense Agreement dated f June 17, 1993 among Johnson & Johnson, the Scripps Research Institute and the Company Concerning Certain Patent Rights 10.6 Assignment dated June 17, f 1993 from Ortho Diagnostic Systems Inc. to the Company concerning certain Patent Rights 10.7 Agreement dated January 24, g 1994 between Meridian Diagnostics, Inc. and Immulok, Inc. MANAGEMENT COMPENSATORY CONTRACTS: 10.8 1994 Directors' Stock Option h Plan 10.9 Savings and Investment Plan b 10.10 Savings and Investment Plan b Trust 10.11 1986 Stock Option Plan e 10.12 Salary Continuation Agreement Filed herewith for John A. Kraeutler 11 Statement re Computation of Filed herewith Per Share Earnings 13 1995 Annual Report to Filed herewith Shareholders 21 Subsidiaries of the b Registrant 23 Consent of Independent Public Filed herewith Accountants 27 Financial Data Schedule Filed herewith - --------------------
a. Incorporated by reference to Registration Statement No. 33-6052 filed under the Securities Act of 1933. - 12 - 13 b. Incorporated by reference to the Company's Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1994. c. Incorporated by reference to the Company's Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1993. d. Incorporated by reference to the Company's Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1992. e. Incorporated by reference to Registration Statement No. 33-89214 on Form S-8 filed with the Securities and Exchange Commission on April 5, 1995. f. Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on June 17, 1993. g. Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on February 8, 1994 and April 6, 1994. h. Incorporated by reference to Registration Statement No. 33-78868 on Form S-8 filed with the Securities and Exchange Commission on May 12, 1994. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last quarter of the fiscal year. - 13 - 14 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. William J. Motto ------------------------------- DATE: December 20, 1995 BY: William J. Motto Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) 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.
Signature Capacity Date --------- -------- ---- William J. Motto Chairman of the Board of Directors December 20,1995 --------------------- and Chief Executive Officer William J. Motto (Principal Executive Officer) Gerard Blain Vice President, Chief Financial December 20,1995 --------------------- Officer and Treasurer (Principal Gerard Blain Financial Officer and Principal Accounting Officer) Jerry L. Ruyan Secretary and Director December 20,1995 ---------------------- Jerry L. Ruyan James A. Buzard Director December 20,1995 --------------------- James A. Buzard Gary P. Kreider Director December 20,1995 --------------------- Gary P. Kreider Robert J. Ready Director December 20,1995 --------------------- Robert J. Ready
- 14 - 15 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 10, 1995. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of 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 10, 1995 - 15 - 16 SCHEDULE II Meridian Diagnostics, Inc. and Subsidiaries Valuation and Qualifying Accounts Years Ended September 30, 1995, 1994 and 1993
Balance Balance at Charged to Charged at End Beginning Costs and to Other of Description of Period Expenses Accounts Deductions Period - ---------------------------------------------------------------------------------------------------------------- Year Ended September 30, 1995: ------------------------------ Allowance for Doubtful Accounts $113,183 $122,526 $4,677 $(76,250) $164,136 Year Ended September 30, 1994: ------------------------------ Allowance for Doubtful Accounts $ 41,424 $ 74,824 $1,523 $ (4,588) $113,183 Year Ended September 30, 1993: ------------------------------ Allowance for Doubtful Accounts $ 68,119 $(23,784) $4,635 $ (7,546) $ 41,424
- 16 - EX-10.12 2 MERIDIAN EX-10.12 1 EXHIBIT 10.12 SALARY CONTINUATION AGREEMENT This Agreement, made and entered into this 19th day of January, 1995, by and between Meridian Diagnostics, Inc., a corporation organized and existing under the laws of the State of Ohio, hereinafter referred to as "Corporation", and John A. Kraeutler, a key employee and executive of the Corporation, hereinafter referred to as "Executive". The Executive has been in the employ of the Corporation for three (3) years and has now and for years past faithfully served the Corporation. It is the consensus of the Board of Directors that Executive's services have been of exceptional merit, in excess of the compensation paid and an invaluable contribution to the profits and position of the Corporation in its field of activity. The Board further believes that Executive's experience, knowledge of corporate affairs, reputation and industry contacts are of such value and his continued services so essential to Corporation's future growth and profits that it would suffer severe financial loss should Executive terminate his services. Accordingly, it is the desire of the Corporation and the Executive to enter into this Agreement under which the Corporation will agree to make certain payments to Executive upon his retirement or disability and, alternatively, to his beneficiaries in the event of his premature death while employed by Corporation. Therefore, in consideration of Executive's services performed in the past and those to be performed in the future and based upon the mutual promises and covenants herein contained, the Corporation and the Executive, agree as follows: I. ARTICLE ONE - DEFINITIONS A. Effective Date The effective date of this Agreement shall be January 19, 1995. B. Normal Retirement Date The Normal Retirement Date shall mean retirement from service with the Corporation which becomes effective on the first day of the calendar month following the month in which the Executive reaches his 62nd birthday. 2 - 2 - C. Early Retirement Date Early Retirement Date shall mean a retirement from service which is effective prior to the Normal Retirement Date, stated above, provided the Executive has attained age 60 and shall have completed 15 years of service. D. Severance Benefits Severance Benefits shall mean those benefits to which the Executive is entitled in the event he is discharged by the Corporation without due cause. Any dispute as to determination of "due cause" shall be subject to the terms of Article VI.B., "Claims Procedure". E. Termination of Service Termination of Service shall mean voluntary resignation of service by the Executive (exclusive of early retirement or disability) or the Corporation's discharge of the Executive for due cause. II. ARTICLE TWO - EMPLOYMENT A. Employment Corporation agrees to employ Executive in such capacity as the Corporation may from time to time determine with such duties, responsibilities and compensation as determined by the Board of Directors. Executive agrees to remain in the Corporation's employment; to devote his full time and attention exclusively to the business of the Corporation and to use his best efforts to provide faithful and satisfactory service to Corporation. Employment services shall include temporary disability not to exceed three months and "leaves of absence" specifically granted Executive by the Board of Directors. 3 - 3 - B. No Employment Agreement Created No provision of this Agreement shall be deemed to restrict or limit any existing employment agreement by and between the Corporation and the Executive nor shall any conditions herein create specific employment rights to the Executive nor limit the right of the Employer to discharge the Executive with or without cause. In a similar fashion, no provision shall limit the Executive's rights to voluntarily sever his employment at any time. III. ARTICLE THREE - BENEFITS The following benefits provided by the Corporation to the Executive are in the nature of a fringe benefit and shall in no event be construed to effect nor limit the Executive's current or prospective salary increases, cash bonuses or profit-sharing distributions or credits. All benefits paid pursuant to the terms of this Agreement are subject to applicable federal, state and local withholding and income taxes. A. Retirement Benefits If Executive shall remain in the employment of the Corporation until the "Normal Retirement Date" defined at Article One, Paragraph 2, then, in such event, he shall be entitled to receive monthly from the Corporation the sum of $2,701.50, commencing on the first day of the month following such "Normal Retirement Date" and continuing for a period of 120 months. In the event the Executive should die following "Normal Retirement" but before the expiration of 120 months, the unpaid balance of such monthly payments shall be paid monthly for the remainder of such period to the beneficiary selected by Executive in the Beneficiary Designation Form provided by the Corporation. In the absence of or failure of the Executive to designate a beneficiary, the unpaid balance shall be commuted at 8% and paid in a lump sum to the personal representative of Executive's estate. B. Early Retirement or Severance Benefit Executive shall have the additional elective right to receive "Early Retirement" or "Severance Benefits", as those terms were earlier defined, provided he shall have attained the age of 60 and has completed 15 years of 4 - 4 - service or, in the alternative, is discharged without cause. Upon Executive's election to receive such benefits, he shall be entitled to receive monthly (beginning on the first day of the month following written notice to the Corporation) level retirement benefits determined by: Multiplying the Normal Retirement Benefit determined in Paragraph A., above, by a fraction: The numerator of which is the actual number of months the Executive has been employed by the Corporation from the effective date of this Agreement until his early retirement or the date of his discharge without cause, and; The denominator of which is the total number of months the Executive would have worked from the effective date of this Agreement until his Normal Retirement Date, as earlier defined. Such Early Retirement or Severance Benefits, as determined above, shall be payable for a continuous period of 120 months provided, however, that should the Executive die prior to the expiration of 120 months, the unpaid balance shall continue for the remainder of such period to the beneficiary selected by the Executive and filed with the Corporation. In the absence of or a failure to designate a beneficiary, the unpaid balance shall be commuted at 8% and paid in a lump sum to the personal representative of the Executive's estate. C. Termination of Service or Voluntary Resignation Should Executive voluntarily resign from his employment or should he be discharged for cause (exclusive of Early Retirement), all Executive's benefits under this Agreement shall be forfeited and this Agreement shall become null and void. If a dispute arises as to discharge "for cause", such dispute shall be resolved as set forth in Article VI.B. D. Death Benefit Prior to Retirement Should the Executive die prior to the Normal Retirement Date (exclusive of Early Retirement or Severance as 5 - 5 - defined elsewhere herein), Corporation agrees to pay to the Executive's designated beneficiary within 60 days following the Executive's death the sum of $4,166.67 for a continuous period of 84 months. If the designated beneficiary should die prior to the expiration of the 84 months, the remaining, unpaid installments shall be commuted at 8% and paid in a lump sum to the personal representative of the designated beneficiary. Executive shall declare his designated beneficiary in writing on a form provided by the Corporation. In the absence of or a failure to designate a beneficiary, or in the event the designated beneficiary shall have predeceased the Executive, the unpaid balance shall be commuted at 8% and paid in a lump sum to the personal representative of the Executive's estate. In the event the Executive's death shall be the result of suicide within a two-year period following the effective date of this Agreement, then no death benefits shall be payable to the Executive or his designated beneficiary. IV. ARTICLE FOUR - RESTRICTIONS UPON FUNDING Corporation shall have no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations under this Agreement. The Executive, his beneficiaries or any successor in interest to him shall be and remain simply a general creditor of the Corporation in the same manner as any other creditor having a general claim for matured and unpaid compensation. The Corporation reserves the absolute right at its sole discretion to either fund the obligations undertaken by this Agreement or to refrain from funding the same and to determine the extent, nature, and method of such funding. Should Corporation elect to fund this Agreement, in whole or in part, through the purchase of life insurance, mutual funds, disability policies or annuities, the Corporation reserves the absolute right, in its sole discretion, to terminate such funding at any time, in whole or in part. At no time shall Executive be deemed to have any lien nor right, title or interest in or to any specific funding investment or to any assets of the Corporation. If Corporation elects to invest in a life insurance, disability or annuity policy upon the life of Executive, then 6 - 6 - Executive shall assist the Corporation by freely submitting to a physical exam and supplying such additional information necessary to obtain such insurance or annuities. V. ARTICLE FIVE - MISCELLANEOUS A. Alienability and Assignment Prohibition Except to the extent provided below, neither Executive, his widow nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Executive or his beneficiary, nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. In the event Executive or any beneficiary attempts assignment, commutation, hypothecation, transfer or disposal of the benefits hereunder, the Corporation's liabilities shall forthwith cease and terminate. Notwithstanding the preceding prohibition, in the event Executive and his spouse divorce, the value of the benefits payable hereunder may be subject to the division for the benefit of Executive's spouse pursuant to a divorce decree or other similar domestic relations order. B. Binding Obligation of Corporation and Any Successor in Interest This Agreement shall be binding upon the parties hereto, their successors, beneficiaries, heirs and personal representatives. C. Amendment and Revocation It is agreed by and between the parties hereto that, during the lifetime of the Executive, this Agreement may be amended or revoked at any time or times, in whole or in part, by the mutual written assent of the Executive and the Corporation. For any benefits not yet accrued pursuant to Article III. B., the Corporation shall have the sole discretion to amend or revoke this Agreement at any time or times, in whole or in part, by a written amendment. For purposes hereof, benefits shall be considered to have accrued only to the extent of the Executive's entitlement under Article III. B. determined 7 - 7 - as if the Executive is discharged without cause as of the date of the amendment. D. Gender Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. E. Effect on Other Corporation Benefit Plans Nothing contained in this Agreement shall affect the right of the Executive to participate in or be covered by any qualified or non-qualified pension, profit-sharing, group, bonus or other supplemental compensation or fringe benefit plan constituting a part of Corporation's existing or future compensation structure. F. Non-compete Agreement In the event the Executive violates any non-competition and confidentiality agreement (or similar agreement) with the Corporation, determined in the sole and absolute discretion of the Plan Administrator, no further benefits shall be payable pursuant to this Agreement. This provision is in addition to any remedies the Corporation might otherwise have for such a violation and does not otherwise modify any such agreement. G. Headings Headings and Subheadings in this Agreement are inserted for reference and convenience only and shall not be deemed a part of this Agreement. H. Applicable Law The validity and interpretation of this Agreement shall be governed by the laws of the State of Ohio. VI. ERISA PROVISIONS A. Named Fiduciary and Plan Administrator The "Named Fiduciary and Plan Administrator" of this plan shall be the Compensation Committee of the Board of Directors of the Corporation. The Named Fiduciary and 8 - 8 - Plan Administrator shall be responsible for the management, control and administration of the Salary Continuation Agreement as established herein. The Named Fiduciary and Plan Administrator may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals. The Named Fiduciary and Plan Administrator shall have all powers necessary to discharge its duties under the Agreement, including the sole and absolute authority to interpret and construe the terms and provisions of this Agreement and to determine eligibility for benefits hereunder. B. Claims Procedure In the event that benefits under this Agreement are not paid to the Executive (or to his beneficiary in the case of the Executive's death) and such claimants feel they are entitled to receive such benefits, then a written claim must be made to the Named Fiduciary and Plan Administrator named above within 60 days from the date payments are refused. The Named Fiduciary and Plan Administrator shall review the written claim and if the claim is denied, in whole or in part, shall provide in writing within 90 days of receipt of such claim, the specific reasons for such denial, reference to the provisions of this Agreement upon which the denial is based and any additional material or information necessary to perfect the claim. Such written notice shall further indicate the additional steps to be taken by claimants if a further review of the claim denial is desired. A claim shall be deemed denied if the Named Fiduciary and Plan Administrator fails to take any action within the aforesaid 90-day period. If claimants desire a second review, they shall notify the Named Fiduciary and Plan Administrator in writing within 60 days of the first claim denial. Claimants may review the Agreement or any documents relating thereto and submit any written issues and comments they may feel appropriate. In its sole discretion, the Named Fiduciary and Plan Administrator shall then review the second claim and provide a written decision within 60 days of receipt of such claim. This decision shall likewise state the specific reasons for the decision and shall include reference to specific provisions of the Agreement upon which the decision is based. This decision of the Named Fiduciary and Plan Administrator 9 - 9 - shall be binding and conclusive upon all parties; and may be overturned by a court of competent jurisdiction only upon a finding that the decision was arbitrary and capricious. IN WITNESS WHEREOF, the parties hereto acknowledge that each has carefully read this Agreement and executed the original thereof on the 27th day of April, 1995 and that, upon execution, each has received a conforming copy. Leslie H. Pease John A. Kraeutler - --------------------------- ---------------------------- WITNESS EXECUTIVE Leslie H. Pease Gerard Blain - --------------------------- ---------------------------- WITNESS CORPORATION EX-11 3 MERIDIAN EX-11 1 EXHIBIT 11 Meridian Diagnostics, Inc. and Subsidiaries Computation of Earnings Per Common Share Periods Ended September 30, 1995, 1994 and 1993
Weighted Avg. Earnings Number of Per Common Shares Net Common Outstanding Income Share ------------- ------ -------- Year Ended September 30, 1995: Shares Outstanding October 1, 12,292,935 $ -- $ -- 1994 Weighted average shares issued during the period (638,237 shares) 66,237 -- -- Weighted average shares redeemed for cash as a result of stock dividend (398 shares) (320) -- -- Treasury shares repurchased (4,100) -- -- (6,291 shares) Net Income -- 3,524,111 -- ------------ ---------- ---------- 12,354,752 $3,524,111 $ 0.2852 Effect of outstanding stock options which is less than 3% and not required to be disclosed in the financial statements (663,553 shares) 318,872 -- -- ------------ ---------- ---------- 12,673,624 $3,524,111 $ 0.2781 Effect of convertible debentures 1,832,891 489,760 -- ------------ ---------- ---------- 14,506,515 $4,013,871 $ 0.2767 Additional effect of stock options at year end stock price 35,088 -- -- ------------ ---------- ---------- 14,541,603 $4,013,871 $ 0.2760 ============ ========== ========== Year Ended September 30, 1994: Shares Outstanding October 1, 12,264,060 $ -- $ -- 1993 Weighted average shares issued during fiscal 1994 (28,875 shares) 13,332 -- -- Net Income -- 2,441,121 -- ------------ ---------- ---------- 12,277,392 $2,441,121 $ 0.1988 Effect of outstanding stock options which is less than 3% and not required to be disclosed in financial statements (339,451 shares) 243,450 -- -- ------------ ---------- ---------- 12,520,842 $2,441,121 $ 0.1950 ============ ========== ========== Year Ended September 30, 1993: Shares Outstanding October 1, 12,262,074 $ -- $ -- 1992 Weighted average shares issued during fiscal 1993 (1,987 shares) 1,717 -- -- Net Income -- 1,889,454 -- ------------ ---------- ---------- 12,263,791 $1,889,454 $ 0.1541 Effect of outstanding stock options which is less than 3% and not required to be disclosed in the financial statements 270,284 -- -- (377,296 shares) ------------ ---------- ---------- 12,534,075 $1,889,454 $ 0.1507 ============ ========== ==========
Note: All share and per share amounts have been retroactively adjusted to reflect the 3 for 2 stock split declared on September 12, 1995. EX-13 4 MERIDIAN EX-13 1 Exhibit 13 [LOGO] MERIDIAN DIAGNOSTICS, INC. 1995 ANNUAL REPORT 2 WHAT WE DO Meridian Diagnostics, Inc. develops, produces and markets reliable, easy-to-use medical diagnostic tests that allow physicians, clinical laboratories, hospitals and, potentially, consumers to identify infectious human diseases rapidly and accurately. Cost-effective diagnostic results contribute to better healthcare by holding down treatment costs and helping people of all ages achieve a higher quality of life. WHO WE ARE Meridian Diagnostics, Inc. is a fully integrated medical diagnostic company that develops, manu- factures and markets a variety of immunodiagnostic test kits, purified reagents such as antigens, monoclonal and polyclonal antibodies, and related diagnostic products. The Company is a leader in the area of rapid diagnosis of infectious human diseases, has a leading market position in fungal serology, and is the leader in parasite and bacterial collection, preservation and specimen transport systems. All Meridian products are used outside of the human body and most require little or no special instrumentation or equipment. Domestic and international market segments consist of hospitals, commercial and reference laboratories, and physicians' offices. 3 Meridian Diagnostics, Inc. and Subsidiaries SELECTED FINANCIAL DATA (Amounts in thousands, except for per share data)
Summary of Operations - --------------------------------------------------------------------------------------------------------------- Years Ended September 30, 1995 1994 1993 1992 1991 =============================================================================================================== Net sales $25,110 $21,877 $16,171 $14,003 $11,085 =============================================================================================================== Gross profit 17,101 14,359 11,073 9,421 7,112 Operating expense 10,525 9,545 7,548 6,805 5,756 - --------------------------------------------------------------------------------------------------------------- Operating income 6,576 4,814 3,525 2,616 1,356 Other income (expense) (616) (831) (424) (11) 162 - --------------------------------------------------------------------------------------------------------------- Earnings before income taxes 5,960 3,983 3,101 2,605 1,518 Income taxes 2,436 1,542 1,212 952 559 Net earnings $ 3,524 $ 2,441 $ 1,889 $ 1,663 $ 959 =============================================================================================================== Primary earnings per common share* $ .29 $ .20 $ .15 $ .13 $ .08 Cash dividends declared and paid per common share* $ .10 $ .08 $ .06 $ .05 $ .05 Weighted average number of shares outstanding* 12,355 12,277 12,264 12,222 12,129 Financial Position at September 30, Working capital $15,826 $13,000 $13,759 $ 5,164 $ 4,046 Total assets 34,569 32,329 26,247 14,099 10,997 Long-term obligations 12,436 14,683 12,260 1,421 83 Shareholders' equity 18,878 13,232 11,617 10,676 9,519 =============================================================================================================== *Adjusted for a three-for-two stock split, October 2, 1995.
PRIMARY EARNINGS SHAREHOLDERS' TOTAL ASSETS NET SALES NET EARNINGS PER SHARE EQUITY (5 Year Compound (5 Year Compound (5 Year Compound Growth Rate +24%) Growth Rate +39%) Growth Rate +37%) 1991 $ 11,085 $ 959 $ .08 $ 9,519 $ 10,997 1992 14,003 1,653 .13 10,676 14,099 1993 16,171 1,889 .15 11,617 26,247 1994 21,877 2,441 .20 13,232 32,329 1995 25,110 3,524 .29 18,878 34,569 Net Sales: Record Net Earnings: Earnings Per Shareholders' Total Assets: Total net sales were driven Record net earnings Share: Earnings per Equity: Shareholders assets increased 7% by higher unit volume resulted from strong share grew 45% to saw the equity of to $34.6 million, in sales of Premier, new product sales $0.29 cents. The the Company increase contrast to the 43% ImmunoCard, (R) and from improved Board of Directors 43% to $18.9 million increase in share- Merifluor(R) and cost efficiencies in approved a three- in fiscal 1995. holders' equity. mononucleosis manufacturing and for-two stock split Shareholders' equity products. Overall net other operations. payable October 2. was increased in sales rose 15%. Net earnings October when the International sales increased 44% to Board of Directors increased to 23% $3.5 million from called for conversion of total net sales. $2.4 million in of the 7 1/4% fiscal 1994. Convertible Subordinated Debentures due 2001.
1 4 TO OUR SHAREHOLDERS Continued execution of our growth strategies produced record results for our customers, our employee-owners, our employee-owners and our shareholders for the seventh consecutive year. In this annual report we are proud to show how Meridian Diagnostics performed in fiscal 1995, through technologies that innovate, products that perform, and results that make a difference. Fiscal 1995 was another record performance year. Sales and earnings reached new highs - our seventh consecutive year of surpassing prior records in annual sales and earnings. Along the way, we added eight new products, including the medical diagnostic industry's first rapid test for the life-threatening toxigenic E. coli bacteria. Sales grew 15% to a record $25.1 million, while net earnings grew 44% to a record $3.5 million, or $0.29 per share. From management's perspective, these solid results were achieved from the favorable combination of increased volume in sales and improved efficiency throughout the organization. Operating income - a key measure of our financial performance - grew substantially, up 37% to $6.6 million in fiscal 1995 from $4.8 million in fiscal 1994. Gross profit as a percent of sales climbed to over 68%, a full 2.5 point gain from fiscal 1994. Operating expenses as a percentage of sales - an important measure of our efficiency - declined 1.7 percentage points to 42%. GROWTH STRATEGIES PRODUCE EXCELLENT RESULTS With our management team and 159 full-time employees, we continue to execute our five-point, long-term growth plan as follows: 1. DEVELOPING NEW PRODUCT TECHNOLOGIES: The eight new products brought to market in fiscal 1995 raised to 56 the number of products we have introduced in the past eight years. Most notable in fiscal 1995 were: - Premier EHEC, the first innunodiagnostic test for clinical laboratories to detect toxigenic E. coli. E. coli has caused a number of deaths nationwide, especially among children who have eaten infected ground beef and other food products. - ImmunoCard (R) H. pylori and an improved Premier H. pylori, quicker, easier-to-use tests for H. pylori, a bacteria linked to stomach ulcers. - Premier Giardia, to detect the most common parasitic cause of diar- rhea among infants. Giardia lamblia produces a significant number of infections in daycare centers throughout the United States. 2. ACQUIRING AND LICENSING PRODUCTS AND TECHNOLOGIES: We completed the integration of eight viral and bacterial tests acquired in January 1994 from Ortho Diagnostic Systems, Inc. (ODSI). Meridian's manufacturing team was able 2 5 to reduce manufacturing costs and our sales and marketing team was able to increase sales of these products, making this acquisition more successful than we had forecasted. Altogether, revenues from these products produced over 15% of our sales in fiscal 1995. 3. GROWING INTERNATIONAL SALES: We expanded international sales to over 23% of total sales. Fueled by Meridian Diagnostics Europe's (MDE) 30% gain, international sales grew solidly. 4. EXPANDING SALES TO THE ALTERNATE SITE MARKETS, SUCH AS THE PHYSICIANS' OFFICE: With our commitment to achieving results that make a difference, Meridian seeks the best marketing or production partners. In August 1995, we signed an exclusive licensing arrangement with BioStar, Inc. of Boulder, Colorado, to distribute our one-minute urinary tract infection test - FiltraCheck-UTI (R) - to the physicians' office market. Early sales results from the pediatric and OB/GYN physician segments are encouraging. 5. ENTERING THE OVER-THE-COUNTER MARKET: FiltraCheck-UTI also has exciting potential for consumer use. Increased awareness of the costs of medical care, changing lifestyles and an emphasis on health and fitness are rapidly expanding demand for diagnostic tests for home use. This billion-dollar market is growing approximately 15% annually. We have partnered with Direct Access Diagnostics, a subsidiary of Johnson & Johnson, to market FiltraCheck-UTI over-the-counter. The application for FDA permission to market is pending, and is expected during fiscal 1996. STRONG PERFORMANCE INCREASES SHAREHOLDER VALUE: In September 1995, the Board of Directors approved a three-for-two stock split. At its November 1995 meeting, the Board of Directors declared a special year-end cash dividend of $.025 per share and raised the indicated annual cash dividend rate to $0.14 per share from $0.1067 cents per share. This change would represent an increase of 31% over the cash payout in fiscal 1994 and the fourth consecutive year of increased dividends. In October 1995, we announced the call of the 7 1/4% Convertible Debentures due 2001. Conversion of the debentures will reduce interest expense, reduce long-term debt, improve the debt-equity ratio, and also increase liquidity of Meridian's common stock. POSITIVE FUTURE OUTLOOK: Meridian Diagnostics is well-positioned to deliver significant value-added benefits - in the healthcare industry - to patients across all age groups. We contribute to and benefit from the healthcare reform movement, the national effort to drive down costs while maintaining the quality of healthcare in the United States. Similar forces are affecting the delivery of healthcare in other countries, creating growing global markets for our cost-effective, accurate and easy-to-use diagnostic tests. Because of these factors and the success of our strategic plan, we expect fiscal 1996 to be another year of growth - another year of delivering superior results and measurable value to benefit all our shareholders. We wish to thank our Board of Directors, shareholders, employee-owners, suppliers and customers for their support. All contributed to our continuing success. Sincerely, William J. Motto John A. Kraeutler Chairman of the Board, President, Chief Executive Officer Chief Operating Officer - - Sales per employee of $161,000 and earnings per employee of $22,600 place Meridian among the top performing companies in the diagnostic industry. - - EQUITIES MAGAZINE ranked Meridian as one of America's fastest growing companies, in the top 1% among 40,000 publicly held companies. - - New products introduced in the past three years accounted for 36% of net sales in fiscal 1995. 3 6 THE VALUE OF MEDICAL DIAGNOSTICS Diagnostic products CUTTING COSTS, contribute significantly IMPROVING OUTCOMES FOOD POISONING to the ability of modern Physicians recognize that with Meridian products have special medicine to treat patients early and accurate diagnosis, relevance in assisting in the more effectively. In an era of they can pinpoint therapies and treatment of infants. increasing concern over the avoid unnecessary medication, Enterohemorrhagic E. coli, imbalance of global health- resulting in faster patient recovery. a deadly food-borne bacteria, care costs, diagnostics are These factors contribute to has caused widespread out- leading-edge tools to contain reducing costs in the healthcare breaks of food poisoning most costs and to improve the system and to increasing often from contaminated ground quality of healthcare. Medical demand for high-quality, easy- beef served in restaurants. diagnostics offer immense to-use diagnostic tests. Immuno- The bacteria toxin attacks the opportunity for growth. diagnostics offer healthcare kidneys, sometimes leading to providers a powerful weapon organ failure and death, A GLOBAL GROWTH INDUSTRY against rising healthcare costs. especially among the very The medical diagnostic field Approximately 90% of all biomed- young and the elderly. Meridian consists of both high-tech ical diagnostic tests are these Diagnostics introduced the equipment and biomedical tests relatively inexpensive, non- industry's first rapid immunoas- for a wide range of diseases and invasive, and highly specific say for Enterohemorrhagic medical disorders. Globally, the products. E. coli in April 1995. Premier market for diagnostic products EHEC, which provides accurate approaches $20 billion a year Historically, clinical and microtiter well testing for large- and is growing at approximately hospital laboratories and hospital scale laboratory test runs, is 9% annually.* Much of this growth networks have been the primary quickly becoming an important is being generated by demand markets for diagnostic tests. In diagnostic solution for U.S. and for immunodiagnostic tests. recent years, health maintenance European market demands. organizations (HMOs), out-patient clinics, physicians' offices and *Source: 1995 Medical and nursing homes have developed Healthcare Guide into important diagnostic market segments. The on-going WALKING PNEUMONIA The low-cost, accurate results of Meridian's diagnostic tests are of particular benefit to senior citizens. The value added in keeping down the expense of diagnosis is evident for this growing segment of the population, many of whom live on fixed incomes and are experiencing worrisome increases in medical expenses. As we age, our body's immune system slows down. Quick, accurate diagnoses enable physicians to treat such illnesses as "walking" pneumonia sooner and with proper therapies. Meridian's ImmunoCard (R) Mycoplasma confirms a diagnosis of "walking" pneumonia within ten minutes -- often while the patient is still in the doctor's office.
4 7 consolidation of the healthcare Meridian Diagnostics concen- industry, in its drive to improve trates on immunodiagnostic tests patient care at the lowest for infectious human diseases. possible cost, has made Meridian began its business in diagnostic testing an integral 1977 coincident with the birth of part of the overall process. the enzyme immunoassay technology used in many test A COMPETITIVE INDUSTRY procedures to detect infection- specific reactions. All of Meridian's Hundreds of companies in tests are noninvasive, i.e., they are the United States alone are for use outside the body. A typical supplying immunodiagnostic Meridian test produces a visual tests. These companies range result, such as a color change, from multinational healthcare that pinpoints a precise antigen entities, for which immuno- or antibody reaction. diagnostics is just one line of business, to small start-up PROVEN LEADERSHIP companies striving for a research breakthrough that With a product array of over 100 will establish them with either diagnostic test products within medical diagnostic or thera- ten product lines, and a full peutic products. complement of market- useful product technologies, At the heart of the Meridian Diagnostics is at the industry are mid-sized, proven, forefront of the industry in technologically-adept medical producing needed diagnostic diagnostic specialists, like solutions that contribute to Meridian Diagnostics, that the quality of life for people feature profitable product of all ages. lines and the ability to deliver high-value new products quickly to a growing marketplace. MONONUCLEOSIS Teenagers are particularlly susceptible to mononucleosis, an infection of the blood that drains the patient's energy. Meridian is a leader in the field of diagnostic tests involving infectious mononucleosis. Meridian markets four tests in four separate technology formals, each designed for the special requirements of the hospital, laboratory and physicians' office customers. Mononucleosis tests are also in high demand in the European market, a particu- larly important segment for Meridian Diagnostics Europe. URINARY TRACT INFECTIONS One of the most common reasons for physician office visits among women and the elderly is urinary tract infection - or UTI. Approximately 65 million tests for UTI are performed in the U.S. annually. FiltraCheck-UTI (R) with its rapid, simple operation, provides a clear positive or negative test result in one minute. In August 1995, Meridian licensed BioStar Inc. of Boulder, Colorado, to market the test nationally to physicians' offices. Early results appear very promising. In addition, Meridian has been involved with Direct Access Diagnostics, a J & J subsidiary, in anticipation of the distribution of FiltraCheck-UTI for sale over-the-counter to consumers in the home healthcare market and is currently awaiting FDA's permission to market. 5 8 HOW WE CREATE VALUE Meridian's products must achieve four criteria to be viable: accuracy, reliability, ease of use and speed of result. This is the value formula we apply to our technologies. Success comes from finding innovative ways to assist healthcare providers in improving outcomes for people exposed to serious infectious diseases. Swift, accurate diag- nosis can mean faster recovery, shorter hospital stays, and less expense, both for the patient and the healthcare system. The product development process at Meridian Diagnostics requires continuous customer focus and market input. Working together in development, our Research & Development, Production, Marketing and Quality Assurance teams are responsible for Meridian's expanding complement of ten product lines and four major technology formats. While we are always reinventing our products for different applications, there are some constants: we seek product improvements that make tests easier to use, require less technical expertise, and yield faster results -- in minutes or hours rather than days. This approach requires tailoring technologies and test formats to meet the special requirements of clinical laboratories, large and small hospitals, the physicians' office, HMOs, nursing homes, and, potentially, the individual consumer. By stressing cross functional teamwork, the Meridian product transfer system successfully introduced a continuous flow of new products in multiple formats. PREMIER EHEC PIONEERS E. COLI DIAGNOSTICS The world became aware of the dangers of food bacteria when outbreaks of food poisoning throughout the U.S. made headlines in 1994. Enterohemorrhagic E. coli (EHEC) is a potentially lethal bacteria that infects undercooked food and can cause kidney failure. The toxin produced by this bacteria has resulted in several deaths, especially among young people who consumed contaminated, inadequately cooked ground beef. Within 12 months of the outbreak, Meridian's Premier EHEC, in its enzyme immunoassay format, was a hospital lab's first and only FDA-approved automated diagnostic test for this pathogen. We recently received FDA permission to market in early fiscal 1996 an improved Premier test that detects these toxins within two hours directly from patient stool samples. Preventing contaminated meat from ever reaching the consumer will be more important to stopping this deadly bacteria. Meridian's product development plans for 1996 include a third test that will detect the E. coli in meat itself, paving the way for regulated screening tests within the food industry. 6 9 TECHNOLOGIES THAT INNOVATE - - Meridian added eight new products in fiscal 1995, most notably, Premier EHEC, Premier Giardia, Para-Pak(R) ULTRA, Para-Pak(R) ECOFIX, MONOSPOT(R) Latex and the highly successful ImmunoCard H. pylori. - - Fiscal 1995 ImmunoCard sales nearly doubled over 1994, due to the new ImmunoCard H. pylori test for gastric ulcers and the recently introduced products for Mycoplasma ("walking" pneumonia), mononucleosis, and Rotavirus (which causes acute gastroenteritis among infants). - - The Company continued to invest substantial resources into future product technologies: a total of $1.4 million in research and development in fiscal 1995. - - Meridian product lines now consist of nearly 100 medical diagnostic products in four primary technological formats: enzyme immunoassay, in both membrane and microtiter, latex agglutination and fluorescent screening. IMMUNOCARD(R) H. PYLORI: COST-EFFECTIVE SCREENING FOR THE ULCER-CAUSING BACTERIA H. PYLORI IN THE PHYSICIAN'S OFFICE U.S. patients make 20 million annual visits to their physicians for gastric distress. In the past, the physician had to perform an endoscopy, an extremely uncomfortable and expensive procedure, for a direct look inside the stomach. Recently, medical research has linked gastric ulcers and other gastric problems directly to the H. pylori bacteria. Responding to this development, Meridian product development teams have now successfully introduced two tests for H. pylori infections. These tests feature accurate, quick diagnosis using patient blood serum. ImmunoCard H. pylori is ideal for individual test applications in the physician's office or such alternate sites as HMOS or nursing homes, and has generated strong unit sales growth in 1995 throughout the U.S. and Europe. In March 1995, Meridian added Premier H. pylori, a test for high-volume clinical laboratories and large hospitals with advanced visual or instrumentation readings. In September 1995, the NEW ENGLAND JOURNAL OF MEDICINE published an article presenting serological tests as the most efficient method of diagnosing the presence of H. pylori-related infections. Meridian expects an increasing number of physicians to rely on our rapid, accurate H. pylori products to diagnose and treat their patients suffering from gastric distress. PARA-PAK(R) ECOFIX AND PARA-PAK(R) ULTRA: ENVIRONMENTALLY SAFER DURING HANDLING AND DISPOSAL One of the longstanding concerns in working with parasite specimens has been the toxic chemical compounds used to preserve the specimens as they are transported to the clinical laboratory for testing. As a world leader in parasitology, Meridian addressed the twin issues of safe handling procedures for lab technicians and safe disposal of fecal specimen vials. The new technology in Para-Pak ECOFIX and Para-Pak ULTRA ECOFIX eliminated mercury and formalin from the preservation media. Eliminating the mercury makes disposal of the specimen vial safer and less costly. The absence of formalin means that the tests no longer have to be processed in a hood and monitored for formaldehyde. Para-Pak ULTRA ECOFIX, marketed in August 1995, offers a closed, one-vial system to transport and filter stool specimens for intestinal parasites. The one-vial system results in safer handling in the laboratory and reduces processing time. 7 10 HOW WE CREATE VALUE The quality equation at Meridian Diagnostics requires that diagnostic test products perform as precisely, accurately and reliably tomorrow as they do today. Being successful in medical diagnostics requires total commitment to quality. Customer loyalty is based on this commitment. Producing medical diagnostic test kits is a highly-specialized manufacturing process. We start our quality process by developing manufacturing standards in the Research & Development lab. By moving it in an integrated process to Production, we improve the quality and efficiency of the eventual transfer of technology. Using the same quality standards produces a consistently high-quality product. R&D works very closely with Production on the technology transfer process. We ensure that manufacturing is accomplished according to monitored standards. In-process quality control has been very successful in helping to eliminate manufacturing problems. Conformance to standards is a competitive prerequisite. We have made quality and the FDA's Good Manufacturing Practices (GMP) our benchmark. With a zero-defect program currently in place, our focus on quality production translates into consistent, accurate product performance. Customers expect quality from products that have Meridian's name on them. By giving our customers the best performing products, we are creating value. NEW PREMIER GIARDIA: ADDRESSING WATER-BORNE PARASITIC DISEASE The Giardia lamblia parasite is often found in municipal water supplies, and is the most common parasitic cause of diarrhea among infants. Giardia inflicts diarrhea, weight loss, abdominal cramps, anemia and potential liver damage. The Centers for Disease Control and Prevention estimates between one-half and one million cases of Giardia infections a year in the United States. Daycare centers, and their ongoing problems in eliminating contact with contaminated fecal matter in diapers, are responsible for nearly 45% of diagnosed infections. Meridian has a strong niche in diagnosing water-borne parasites. Premier Giardia lamblia enzyme immunoassay kits were introduced in July 1995 specifically for hospitals and labs that perform a high volume of diagnostic tests. Speed and precision in batch tests are crucial in these situations. The test requires neither instrumentation nor special specimen preparation and has an accuracy in sensitivity and specificity exceeding 97%. Meridian's other reliable, established tests to detect water-borne parasites include Merifluor(R) Cryptosporidium/Giardia and Premier Cryptosporidium. 8 11 PRODUCTS THAT PERFORM - - Meridian generated its seventh consecutive year of record sales, highlighted by four record quarters in fiscal 1995. - - Strong unit volume growth in new product sales of Premier, ImmunoCard, Merifluor and mononucleosis lines produced record annual sales, and strengthened Meridian's leadership positions in fungal, viral and parasitology diagnostics. - - New marketing/sales agreement in 1995 expaned our sales capabilities in the new markets: FiltraCheck to physicians' office market via BioStar alliance. - - Meridian President and Chief Operating Officer Jack Kraeutler and Meridian Quality Assurance Director Deborah Hoffer elected to The GMP Institute Hall of Fame for outstanding achievement in applying conformance to manufacturing standards. IMMUNOCARD(R) MYCOPLASMA: A UNIQUE TEST FOR A MAJOR RESPIRATORY PATHOGEN Sales of ImmunoCard Mycoplasma, introduced in fiscal 1994, increased more than tenfold in fiscal 1995 and are representative of Meridian's strength in respiratory diagnostics. Pneumonia is the fifth leading cause of death worldwide. Mycoplasma or "walking" pneumonia accounts for 20% of this total. The product's sales success is due to it being the market's only rapid test (results in less than ten minutes) for Mycoplasma that detects early or acute infection and distinguishes it from the disease's convalescent state. ImmunoCard's accurate enzyme immunoassay technology produces a color change enabling accurate interpretation of results. C. DIFFICILE: A FAMILY OF TESTS MEETS CUSTOMERS' DIFFERENT NEEDS Clostridium difficile bacteria causes severe diarrhea among hospital patients who are being treated with antibiotics and may be associated with other hospital-acquired infections. Rapid, accurate diagnosis of the bacteria is critically important in achieving early teatment, restoring patients to good health more quickly and reducing time in the hospital. Meridian's diagnostic products for C. difficile illustrate our ability to produce cost effective diagnostic solutions for niche disease states in multiple customer formats. Premier C. difficile, our original Premier product introduced in 1992, continues to be one of the most sought-after products for use in hospitals and labs that generate a large volume of diagnostic tests. Within two hours, and with a minimum of processing, Premier C. difficile yields results that are 98.2% accurate, resulting in rapid diagnosis and early intervention of therapy. In 1993, we enhanced our C. difficile expertise with ImmunoCard(R) technology. ImmunoCard is an individual test, ideal for the small laboratory market. It yields results in 15 minutes without any special instumentation and features an easy-to-read color change reaction that takes guesswork out of deciphering results. Meridian also offers a third C. difficile test for labs that prefer a latex slide, Meritec(TM) C. difficile, a quick, economical way of confirming whether the common antigens of the bacteria are present in stool samples. Meritec produces results in minutes. 9 12 HOW WE CREATE VALUE Seven consecutive years of record sales, seven consecutive years of record earnings: We deliver products that perform for our customers. We produce results that increase shareholder value. Working for Meridian Diagnostics is more than a job. It means working with people who are committed to the success of the Company. The commitment shows in the cooperation among departments. It works in our cross-functional teams. R&D, Laboratory Production, Sales, Customer Support, Marketing and Administration - we all focus on serving the customer. This effort bears fruit in enthusiastic dedication to quality, continuously seeking ways to make our tests easier to use, more efficient and more effective. Zero defects is our quality goal. We apply our resources to meet the needs of the lab technician, nurse and doctor's assistant. This spirit of dedication and performance record has combined to produce an unbroken string of record financial results, greater total investment return and an emerging global reputation among our customers. INTERNATIONAL SALES Meridian's products are sold throughout the world. Fiscal 1995 international sales set records again - in boosting that sales level to $5.8 million, or 23% of total sales. Meridian Diagnostics Europe (MDE) performed superbly, producing the largest share of international sales. MDE sales gained 30%, or more than $1.2 million to $5.1 million in fiscal 1995 from $3.9 million in fiscal 1994. Growth came primarily from increased unit sales, particularly in the mononucleosis line, Premier products for batch testing for gastroenterological infections and new ImmunoCard products for individual diagnostic testing. ImmunoCard sales alone grew more than 200% from fiscal 1994. From our base in Italy we are planning to increase our presence in the European community in fiscal 1996. The same desire to contain healthcare costs that is driving healthcare in the United States is at work in Europe and, in fact, around the world, affording Meridian great opportunities for further global growth. 10 13 RESULTS THAT MAKE A DIFFERENCE - - The State of Ohio recognized our international achievements with the Governor's 1995 E Award for success in exporting. International sales, including exports and the sales or Meridian Diagnostics Europe, hit a record 23% of total sales. - - For the fourth year in a row, FINANCIAL WORLD magazine placed Meridian Diagnostics among the top U.S. growth companies. The CLEVELAND PLAIN DEALER also cited our accomplishments, rating Meridian Diagnostics one of Ohio's 100 best companies for the fifth consecutive year. - - Operating expenses as a percentage of sales - an important measure of our efficiency - declined nearly two points to 42%; gross profit improved over two points to 68% of sales. TOLL-FREE ON-LINE ASSISTANCE: GREATER CUSTOMER SATISFACTION Supporting the customer is essential to achieving outstanding results year-in and year-out. In June 1995, we added a dedicated direct access line for customer service. Our network of customer service representatives take customer calls from 8 a.m. to 6 p.m. daily. Customer response to this new feature has been gratifying. Further enhancements are in the plannning stage for implementation in fiscal 1996. Customer service is a requirement that affects us all directly. For example, if there is a customer question about reagents in our production process, we train our Laboratory Production representatives to respond directly. Who better to fulfill a customer requirement than the appropriate expert? Likewise, when a lab technician customer has a question in the performance of a test, the appropriate Meridian sales representative with a technical background will respond directly. Customers see Meridian services like these as an important added value. FILTRACHECK-UTI: MAKING NEW MARKET OPPORTUNITIES To achieve results for the customer and the shareholder, Meridian is committed to expanding new product sales through new market opportunities. To fulfill the sales potential of the FiltraCheck-UTI test, we licensed BioStar, Inc. in August 1995 to distribute the product line to physicians' offices nationwide. BioStar is an established medical diagnostics company with a sales force of 120 and an accomplished sales track record to physicians' offices. Millions of women with symptoms of urinary tract infection (UTI) annually seek out their physicians for treatment. UTI also afflicts hospital patients, especially senior citizens. In the United States alone, there are 65 million office visits a year for this disorder. Meridian's FiltraCheck-UTI is a true diagnostic innovation: it can halve the expense to the healthcare system of determining whether a patient is suffering from UTI. The diagnostic benefit to the patient is quicker relief through earlier treatment. To bring the benefits of FiltraCheck-UTI directly to the consumer, our distribution partner, Direct Access Diagnostics, a subsidiary of Johnson & Johnson, is seeking FDA permission to sell to the over-the-counter market. EFFICIENCY: NEW CONSOLIDATED SPACE We consolidated warehousing and manufacturing operations at our headquarters complex in Cincinnati, Ohio, during fiscal 1995 by adding 39,000 square feet of new administrative and manufacturing space at a cost of $1.4 million. We have now begun renovating our former administrative offices and laboratory manufacturing space. This project, budgeted at $1.2 million, will be completed in June 1996. Bringing our operations together into one corporate campus increases efficiency and improves management control. As we grow and consolidate, Meridian strives to maintain interaction among the key functional areas of the Company. Challenge Teams comprised of representatives for Laboratory Production, Manufacturing, R&D, Quality Assurance and Administration constantly examine Meridian's operations to improve efficiency and reduce costs. 11 14 Meridian Diagnostics, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL 1995 COMPARED TO FISCAL 1994 Net sales increased $3,233,000, or 15%, to $25,110,000 in fiscal 1995 from $21,877,000 in fiscal 1994. This increase was primarily from unit volume growth in the Premier, ImmunoCard, Merifluor and mononucleosis lines plus OEM sales of Epstein Barr Virus. The major growth areas are in those tests used for identification of infectious diseases such as C. difficile/Toxin A, mononucleosis, Mycoplasma and Herpes simplex virus. Of the increase of $3,233,000, $1,112,000, or 34%, was attributable to the full year sales of the infectious disease product line acquired in January 1994 from an affiliate of Ortho Diagnostics Systems, Inc. (ODSI). The increase in sales of $3,233,000 was more than accounted for by volume of $3,271,000, or 15%, offset marginally by price decreases of $38,000 with no impact from currency translation. European sales increased $1,175,000 to $5,102,000, or 30%, from $3,927,000 as a result of continued strong unit growth in the Premier line, up 45% (Toxin A, H. pylori and EHEC - introduced during the second quarter); the mononucleosis line, up 21%; ImmunoCard, which almost tripled largely from new products (Mycoplasma, mononucleosis, Rotavirus and H. pylori) and Merifluor, up 81%. The increase in net sales was accounted for by volume, $951,000, or 24%, and price, $223,000, or 6%. The effect of currency translations was negligible. Gross profit increased $2,742,000, or 19%, to $17,101,000 for the year, from $14,359,000 in fiscal 1994. As a percentage of sales, gross profit increased to 68.1% in fiscal 1995 from 65.6% in fiscal 1994. This improvement was due primarily to the transfer and in-house manufacture of the product lines acquired from ODSI in June 1993 and January 1994, which prior to October 1994, were purchased under a supply agreement with ODSI. Fiscal 1994 costs also included integration of the ODSI infectious disease product line into Meridian's manufacturing facilities in Cincinnati. Other factors contributing to the improvement included continued favorable efficiency and volume variances from the sales increase, the new warehouse facilities, and the reduction in factory overhead including decreased rent expense from the new on-site warehouse, lower insurance and employee benefit expense, plus a reduction in travel. Operating expenses increased $980,000, or 10%, to $10,525,000 for the fiscal year from $9,545,000, in fiscal 1994, but declined as a percentage of sales from 43.6% in fiscal 1994 to 41.9% in fiscal 1995. Research and development expenses were marginally lower than the prior year, from $1,433,000 in fiscal 1994 to $1,432,000 in fiscal 1995. Selling and marketing expenses increased $481,000, or 10%, versus fiscal 1994, mainly from higher personnel costs in the U.S. and Europe, higher convention, meeting, sample and promotion expenses associated with new product introductions and the full year impact of the infectious disease product line acquired from ODSI. General and administrative expenses increased $499,000, or 15%, due to increased personnel costs in the U.S. and Europe stemming from the higher level of business, an increase in depreciation from the expanded office facilities plus the full year impact of depreciation from assets acquired from ODSI and a general increase in the provision for doubtful accounts to reflect added coverage given the increasing sales level. Operating income as a result of the above increased $1,762,000, or 37%, to $6,576,000 in fiscal 1995 from $4,814,000 in fiscal 1994. As a percent of sales, operating income improved to 26.2% in fiscal 1995 compared to 22.0% in fiscal 1994. Other expenses decreased $214,000, or 26%, to $616,000 compared to $831,000 in fiscal 1994. This decrease was more than accounted for from higher investment income stemming from an improvement in interest rates compared to last year plus commission income related to the sale of certain tissue culture products acquired from ODSI and sold to VAI Diagnostics, Inc. in March 1994. Gains/losses in foreign exchange were not material in either fiscal year. The cumulative foreign currency translation adjustment changed by $32,000 during the year as a result of strengthening of the U.S. dollar against the Lira during the period. The Company's effective tax rate increased for the year as a result of a higher proportion of income from the Company's European subsidiary in Italy, which is taxed at a signifcantly higher rate than the U.S. domestic rate. The effective tax rate was 40.9% in fiscal 1995 compared to 38.7% for the prior year. FISCAL 1994 COMPARED TO FISCAL 1993 Net sales increased $5,706,000, or 35%, to $21,877,000 in fiscal 1994 from $16,171,000 in fiscal 1993. This increase resulted primarily from higher unit volumes resulting from the acquisition of the infectious mononucleosis product line acquired in June 1993 and the acquisition of the infectious disease product line acquired in January 1994 from ODSI, plus strong unit growth in the ImmunoCard and Merifluor product lines. The increase in sales of $5,706,000 was comprised of volume of $5,139,000, or 32%, price of $899,000, or 12 15 Meridian Diagnostics, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 5%, offset by currency of ($332,000) or (2%). European sales increased $1,447,000, or 58%, to $3,927,000 from $2,480,000 largely due to MONOSPOT (R) and MONOLERT (R) products acquired from ODSI in June 1993, plus unit growth in the Para-Pak, Merifluor and Premier product lines. This increase in net sales was attributed to volume of $1,114,000, or 45%, price of $665,000, or 27%, offset by currency of ($332,000), or (14%). The increase from pricing stemmed from the expiration in 1994 of contract supply prices in effect at the time of the mononucleosis product line aquisition in fiscal 1993. Gross profit increased $3,286,000, or 30%, to $14,359,000 for the year, from $11,073,000 in fiscal 1993. As a percentage of sales, gross profit declined to 65.6% in fiscal 1994 from 68.5% in fiscal 1993. This decline is due to several factors including the impact of the lower margin ODSI product line acquisitions - in part provided under a supply agreement - which ended June 30, 1994, except for MONOSPOT which ended in October 1995. Other factors impacting gross profit were increased manufacturing costs, higher scrap and obsolescence costs stemming from product development including validation batches, minor product discontinuations and additional costs associated with packaging standardization. Also impacting manufacturing cost was the transfer and integration of the ODSI infectious disease product line into Meridian's facilities in Cincinnati. Operating expenses increased $1,997,000, or 26%, to $9,545,000 for the fiscal year from $7,548,000 in fiscal 1993, but declined as a percentage of sales from 46.7% in fiscal 1993 to 43.6% in fiscal 1994. Research and development expense increased $268,000, or 23%, over fiscal 1993 primarily from higher personnel costs, increased clinical trial activity and laboratory supplies associated with new product development and depreciation expense stemming from equipment acquired during the year from ODSI. Selling and marketing expenses increased $1,031,000, or 28%, during the year, primarily as a result of the amortization of the purchase price of the ODSI product line acquisitions, higher personnel costs in the U.S. and Europe from the addition of sales representatives and higher promotional expenses in the U.S. associated with new products and, in Europe, from the expansion of the direct sales and distribution to customers in Italy. General and administrative expenses increased $698,000, or 26%, due to amortization of the ODSI acquisitions, increased personnel costs in the U.S. and Europe to support the continued growth in the business, higher depreciation expense related to equipment acquired from ODSI plus an increase in the provision for potential doubtful accounts. Operating income as a result of the above increased $1,289,000, or 37%, to $4,814,000 in fiscal 1994 from $3,525,000 in fiscal 1993. Other expense increased in fiscal 1994 $406,000 which was more than accounted for by higher interest expense and amortization of debt expenses attributed to the $11,500,000 of 7 1/4% Convertible Subordinated Debentures issued in September 1993. These increases in debenture-related expenses were offset by the one-time write-off of $405,000 in fiscal 1993 of expenses associated with the Company's planned offering of Common Stock, which was withdrawn on July 29, 1993. The after tax impact on earnings of this withdrawal cost was $255,000 or $0.02 per share in 1993 as adjusted. The Company's effective tax rate declined marginally for the year as a result of a higher proportion of the income in the U.S. which is taxed at a significantly lower rate than in Italy. The effective tax rate was 38.7% in fiscal 1994 compared to 39.1% in fiscal 1993. Effective October 1, 1993 the Company adopted Financial Accounting Standards Statement No. 109, "Accounting for Income Taxes." Prior period financial statements have not been restated to reflect the new accounting method since the cumulative effect of this change as well as the effect of this new standard on income tax expense for Fiscal 1994 was not material. LIQUIDITY AND CAPITAL RESOURCES Construction of 19,000 square feet of additional and renovated manufacturing and administrative space, which began in August 1994, was completed in September 1995 at a total cost of $1,400,000. This construction was funded by a construction loan to be converted to a long-term mortgage August 1, 1996, detailed in Note 5 in Notes to Consolidated Financial Statements. Total capital expenditures for the year, including the above mentioned project, were $2,500,000. The Company commenced renovation of the former administrative offices and laboratory manufacturing space in October 1995 at an estimated cost of $1,200,000 which will complete the Company's expansion project begun in late 1993. Completion of this phase is expected to be June 1996. The Company's anticipated total capital expenditures for fiscal 1996 are $1,900,000. At September 30, 1995, the Company had cash and short-term investments of $8,919,000 and working capital of $15,826,000. Trade accounts receivable increased $1,313,000, or 25%, while inventories increased $13,000, less than 1%, compared to September 30, 1994. The increase in receivables stems in part from the 13 16 Meridian Diagnostics, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) growth in European receivables which are in line with the significant increase in European sales. The balance relates to U.S. operations and is attributable to special dating offers associated with new product stocking orders plus some shifting in the timing of remittances. The change in inventories reflects improved turnover and tighter control of stock levels. Cash flow from operations is expected to continue to fund working capital requirements for the foreseeable future. Currently the Company has available $6,000,000 in a line of credit with a commercial bank. On September 12, 1995 the Company declared a 3-for-2 stock split payable October 2, 1995 to shareholders of record on September 22, 1995. The Board of Directors announced on October 10, 1995 that it would call the outstanding balance of its 7 1/4% Convertible Subordinated Debentures due 2001 for redemption on November 30, 1995. Approximately $7,400,000 principal amount of the Debentures was outstanding at the time of the announcement. About $4,100,000 had been converted or tendered for conversion into shares of the Company's common stock. As of November 30, 1995, $113,000 was outstanding. Holders of the Debentures had the option of converting their Debentures into shares of Meridian Diagnostics' common stock prior to the redemption date of November 30, 1995 at a conversion price of $5.97 per share or, upon delivery of the Debentures, receiving cash. The Debentures were redeemable at 105% of their face amount plus accrued interest, or $1,068.08 per each $1,000 principal amount. The conversion price of $5.97 per share was equivalent to a conversion rate of 167.5 shares per each $1,000 principal amount of Debentures. Retirement of the Debentures, through conversion, on a pro forma basis, would reduce the Company's annual pre-tax interest expense by $834,000, increase shareholders' equity and reduce long-term debt by $7,980,000 and improve the debt-to-equity relationship from about 68% to 18%. The pro forma per share dilution for the fiscal year ended September 30, 1995 was about $0.01. Of the original $11,500,000 principal amount of Debentures, all but $113,000 had been converted as of November 30, 1995, with this amount expected to be redeemed. On November 14, 1995 the Board of Directors declared a special year-end cash dividend of $0.025 per share for fiscal 1995, payable December 1, 1995 to shareholders of record on November 24, 1995. The Board of Directors also announced its intention to increase the regular annual dividend rate from $0.1067 to $0.14 per share for fiscal 1996. The new annual cash dividend rate for fiscal 1996 of $0.14 per share would represent a 31% increase over the prior 1995 rate of $0.1067 per share. Total dividends paid during fiscal 1995 were $1,225,000 compared to $908,000 paid in fiscal 1994. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Meridian Diagnostics, Inc.: We have audited the accompanying consolidated balance sheets of MERIDIAN DIAGNOSTICS, INC. and subsidiaries as of September 30, 1995 and 1994, and the related consolidated statements of earnings,shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Meridian Diagnostics, Inc. and subsidiaries as of September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cincinnati, Ohio, November 10, 1995 14 17 Meridian Diagnostics, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------- As of September 30, 1995 1994 =================================================================================================================== ASSETS CURRENT ASSETS: Cash and short-term investments (Note 2) $ 8,918,637 $ 8,831,983 Accounts receivable, less allowance of $164,136 in 1995 and $113,183 in 1994 for doubtful accounts 6,482,999 5,169,989 Inventories (Note 3) 3,032,655 3,020,071 Prepaid expenses and other 321,775 108,423 Deferred tax assets 324,910 282,929 - -------------------------------------------------------------------------------------------------------------------- Total current assets 19,080,976 17,413,395 - -------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Land 269,217 273,688 Buildings and improvements 6,162,668 3,716,649 Machinery, equipment and furniture 5,525,455 4,595,550 Construction in progress - 1,063,702 - -------------------------------------------------------------------------------------------------------------------- 11,957,340 9,649,589 Less-accumulated depreciation and amortization 4,816,905 4,248,561 - -------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 7,140,435 5,401,028 - -------------------------------------------------------------------------------------------------------------------- OTHER ASSETS (NOTES 1 AND 4): Long-term receivable 12,670 - Deferred tax assets 87,879 59,841 Deferred debenture offering costs, net of accumulated amortization of $133,357 in 1995 and $96,876 in 1994 395,731 665,595 Covenants not to compete, net of accumulated amortization of $1,827,718 in 1995 and $1,337,375 in 1994 2,432,876 2,923,219 License agreements, net of accumulated amortization of $772,433 in 1995 and $714,878 in 1994 362,680 420,235 Patent, tradenames and distributorships, net of accumulated amortization of $475,762 in 1995 and $267,365 in 1994 1,837,238 2,045,635 Other intangible assets, net of accumulated amortization of $85,570 in 1995 and $43,503 in 1994 620,192 685,218 Cost in excess of net assets acquired, net of accumulated amortization of $458,482 in 1995 and $255,753 in 1994 2,598,511 2,714,964 - -------------------------------------------------------------------------------------------------------------------- Total other assets 8,347,777 9,514,707 - -------------------------------------------------------------------------------------------------------------------- Total assets $34,569,188 $32,329,130 ==================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term obligations (Note 5) $ 381,932 $ 367,969 Current portion of capital lease obligation (Note 5) 63,561 - Accounts payable 689,869 1,843,489 Accrued payroll and payroll taxes 723,946 650,530 Other accrued expenses 937,348 649,732 Income taxes payable 458,707 902,069 - -------------------------------------------------------------------------------------------------------------------- Total current liabilities 3,255,363 4,413,789 - -------------------------------------------------------------------------------------------------------------------- LONG-TERM OBLIGATIONS (NOTE 5) 12,285,668 14,683,369 - -------------------------------------------------------------------------------------------------------------------- CAPITAL LEASE OBLIGATIONS (NOTE 5) 149,925 - - -------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY (NOTE 7): Preferred stock, no par value, 1,000,000 shares authorized; none issued - - Common stock, no par value, 25,000,000 shares authorized; 12,924,814 and 12,292,935 shares issued and outstanding, respectively, stated at 1,487,159 1,179,583 Additional paid-in capital 13,895,901 10,824,012 Retained earnings 3,747,930 1,448,736 Cumulative foreign currency translation adjustment (252,758) (220,359) - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 18,878,232 13,231,972 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $34,569,188 $32,329,130 ==================================================================================================================== The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
15 18 Meridian Diagnostics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS
- ------------------------------------------------------------------------------------------------- For the Years Ended September 30, 1995 1994 1993 ================================================================================================= NET SALES $25,109,711 $21,876,773 $16,170,990 COST OF SALES 8,008,529 7,518,179 5,097,988 - ------------------------------------------------------------------------------------------------- Gross profit 17,101,182 14,358,594 11,073,002 - ------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Research and development 1,432,315 1,432,928 1,165,210 Selling and marketing 5,228,717 4,747,398 3,715,517 General and administrative 3,864,294 3,364,584 2,667,172 - ------------------------------------------------------------------------------------------------- Total operating expenses 10,525,326 9,544,910 7,547,899 - ------------------------------------------------------------------------------------------------- Operating income 6,575,856 4,813,684 3,525,103 - ------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Licensing and related fees 102,698 - 55,000 Interest income 435,686 253,644 56,551 Interest expense (1,134,844) (1,092,345) (178,950) Cost of withdrawn stock offering - - (404,499) Other, net (19,470) 8,420 48,153 - ------------------------------------------------------------------------------------------------- Total other income (expense) (615,930) (830,281) (423,745) - ------------------------------------------------------------------------------------------------- Earnings before income taxes 5,959,926 3,983,403 3,101,358 INCOME TAXES (NOTE 6) 2,435,815 1,542,282 1,211,904 - ------------------------------------------------------------------------------------------------- Net earnings $ 3,524,111 $ 2,441,121 $ 1,889,454 ================================================================================================= PRIMARY WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 12,354,752 12,277,392 12,263,791 ================================================================================================= PRIMARY EARNINGS PER COMMON SHARE $.29 $.20 $.15 ================================================================================================= FULLY DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,541,603 NA NA ================================================================================================= FULLY DILUTED EARNINGS PER COMMON SHARE $.28 NA NA ================================================================================================= The accompanying notes to consolidated financial statements are an integral part of these statements.
16 19 Meridian Diagnostics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOIDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------- Cumulative Number of Foreign Common Shares Additional Currency Issued and Common Paid-In Retained Translation Outstanding Stock Capital Earnings Adjustment Total =========================================================================================================================== BALANCE AT SEPTEMBER 30, 1992 7,705,453 $ 851,975 $ 7,563,763 $2,258,187 $ 2,560 $10,676,485 Net earnings - - - 1,889,454 - 1,889,454 Cash divdends paid - $.06 per share as adjusted - - - (702,325) - (702,325) Exercise of stock options 1,249 900 4,839 - 5,739 3% stock dividend 231,201 154,142 1,811,067 (1,965,209) - - Foreign currency translation adjustment - - - - (252,341) (252,341) - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1993 7,937,903 1,007,017 9,379,669 1,480,107 (249,781) 11,617,012 Net earnings - - - 2,441,121 - 2,441,121 Cash dividends paid - $.08 per share as adjusted - - - (908,209) - (908,209) Exercise of stock options 18,689 12,638 39,988 - - 52,626 3% stock dividend 238,698 159,928 1,404,355 (1,564,283) - - Foreign currency translation adjustment - - - - 29,422 29,422 - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1994 8,195,290 1,179,583 10,824,012 1,448,736 (220,359) 13,231,972 Net earnings - - - 3,524,111 - 3,524,111 Fractional shares (570) (293) (3,049) - - (3,342) Cash dividends paid - $.10 per share as adjusted - - - (1,224,917) - (1,224,917) Exercise of stock options 42,849 14,961 34,131 - - 49,092 3 for 2 stock split 4,097,645 - - - - - Debenture Conversions (Note 5) 589,600 292,908 3,040,807 - - 3,333,715 Foreign currency translation adjustment - - - - (32,399) (32,399) - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1995 12,924,814 $1,487,159 $13,895,901 $3,747,930 $(252,758) $18,878,232 ============================================================================================================================ The accompanying notes to consolidated financial statements are an integral part of these statements.
17 20 Meridian Diagnostics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------- For the Years Ended September 30, 1995 1994 1993 ================================================================================================================= CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 3,524,111 $ 2,441,121 $ 1,889,454 Non-cash items- Depreciation and amortization of property, plant and equipment 863,436 703,190 580,979 Amortization of intangible assets 1,147,987 1,009,950 471,045 Deferred interest expense 154,950 94,978 - Revenues received in advance recorded in income - - (55,000) Deferred income taxes (70,019) (263,977) 28,079 Changes in current assets excluding cash and short-term investments (1,611,612) (1,865,471) (1,328,516) Changes in current liabilities excluding current portion of long-term obligations (1,150,277) 2,305,066 516,355 Long-term receivable and payable (2,470) - - - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 2,856,106 4,424,857 2,102,396 - ----------------------------------------------------------------------------------------------------------------- CAAH FLOWS FROM INVESTING ACTIVITIES: Property, plant, and equipment acquired, net (2,472,177) (1,426,485) (718,135) Product line acquisition- Inventory and equipment - (571,446) (262,972) Covenants not to compete - (1,100,000) (1,500,000) Patent, tradenames, customer lists and other - (1,375,000) (1,394,000) Cost in excess of net assets acquired - (346,434) (297,722) Proceeds from sale of product line - 500,000 - Acquisition of license agreements - (55,898) (80,000) Advance royalties paid - (25,000) - - ----------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (2,472,177) (4,400,263) (4,252,829) - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from subordinated debentures, net of offering costs - - 10,737,530 Proceeds from other long-term obligations 1,284,005 634,970 - Repayment of long-term obligations (388,246) (462,339) (219,145) Dividends paid (1,224,917) (908,209) (702,325) Proceeds from issuance of common stock 45,750 52,626 5,739 Effect of exchange rate changes on cash (13,867) 14,749 (6,229) - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (297,275) (668,203) 9,815,570 - ----------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 86,654 (643,609) 7,665,137 CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 8,831,983 9,475,592 1,810,455 - ----------------------------------------------------------------------------------------------------------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $8,918,637 $8,831,983 $9,475,592 - ----------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for- Income taxes $2,882,336 $1,034,000 $1,195,000 Interest 883,356 852,265 160,062 Capitalized lease obligations 259,240 - - Estimated contingent consideration related to product line acquisitions (Note 5) - 1,972,000 - Conversion of debentures to common stock, net of amortization of deferred debenture offering costs of $186,285 (Note 5) 3,333,715 - - The accompanying notes to consolidated financial statements are an integral part of these statements.
18 21 Meridian Diagnostics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the accounts of Meridian Diagnostics, Inc. and its subsidiaries, Omega Technologies, Inc., Meridian Diagnostics Europe s.r.l. ('MDE') and Meridian Diagnostics International, Inc. (collectively, 'Meridian' or the 'Company'). All significant intercompany accounts and transactions have been eliminated in consolidation. (B) SHORT-TERM INVESTMENTS--The Company adopted Statement of Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115) in 1995. In accordance with FAS 115, prior year's financial statements have not been restated to reflect the change in accounting method. There was no cumulatlve effect as a result of adopting FAS 115 in 1995. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale, along with any equity securities. At September 30, 1995, the Company's investments in debt and equity securities were classified as cash and short-term investments due to their short-term nature. These investments are diversified among high credit quality securities. The estimated fair value of cash investments approximates cost, and therefore, there are no unrealized gains or losses as of September 30, 1995. (C) INVENTORIES--Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. (D) PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at cost. Upon retirement or other disposition of property, plant and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss is reflected in earnings. Maintenance and repairs are expensed as incurred. Depreciation and amortization are computed on the straight-line method in amounts sufficient to write-off the cost over the estimated useful lives as follows: Buildings and improvements - 5 to 33 years Machinery, equipment and furniture - 3 to 10 years (E) OTHER ASSETS--Other assets are stated at cost less accumuIated amortization and are being amortized on a straight line basis over their estimated useful lives: Covenants not to compete - 7 to 10 years License agreements -- 3 to 10 years Patents, tradenames and distributorships - 10 to 15 years Cost in excess of net assets acquired and other intangible assets - 15 years Deferred debenture offering costs - 8 years Subsequent to their acquisition, the Company continually evaluates whether subsequent events and circumstances have occurred that indicate the remaining estimated useful lives of intangible assets may warrant revision or that the remaining balances of these assets may not be recoverable. When factors indicate that an intangible asset should be evaluated for possible impairment, the Company uses an estimate of the related product line's cash flow over the remaining life of the asset in measuring whether the asset is recoverable. (F) INCOME TAXES--The provision for income taxes includes federal, foreign, state and local income taxes, currently payable and those deferred because of temporary differences between income for financial reporting and income for tax purposes. Research and experimentation credits are reflected as a reduction in income taxes when realized. Effective October 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, 'Accounting for Income Taxes'. Prior period financial statements have not been restated to reflect the new accounting method. The cumulative effect of this change, as well as the effect of this new standard on income tax expense for the year ended September 30, 1994, and for each of the quarters in the period then ended, is not material. (G) EARNINGS PER COMMON SHARE--Primary earnings per common share are based on the weighted average number of common shares outstanding during the year. No material dilution results from outstanding stock options which are the only common stock equivalent. Fully diluted earnings per share are dilutive for fiscal 1995 only and include the impact of assuming the convertible subordinated debentures are converted, net of the impact of pro forma interest expense. 19 22 Meridian Diagnostics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) On September 12, 1995, the Company's Board of Directors declared a three-for-two stock split to shareholders of record on September 22, 1995. On November 16, 1994, the Company's Board of Directors declared a 3% stock dividend. On December 1, 1993, the Company's Board of Directors declared a 3% stock dividend. On November 23, 1992, the Company's Board of Directors declared a 5% stock dividend, and in March 1992, the Company's Board of Directors declared a three-for-two stock split. All data with respect to earnings per share, dividends per share and weighted average number of shares outstanding has been retroactively adjusted to reflect the stock splits and stock dividends. (H) RESEARCH AND DEVELOPMENT COSTS--Research and development costs are charged to earnings as incurred. (I) REVENUE RECOGNITION--Revenue is recognized from sales when a product is shipped. Income from licensing agreements is recognized as earned and as stipulated by the respective agreements. (J) TRANSLATION OF FOREIGN CURRENCY--Assets and liabilities of foreign operations are translated using year-end exchange rates and revenues and expenses are translated using exchange rates prevailing during the year, with gains or losses resulting from translation included in a separate component of shareholders' equity. Gains and losses resulting from transactions in foreign currencies were immaterial. (K) SEGMENT DATA AND MAJOR CUSTOMERS--The Company was formed in June 1976 and functions as a research, development, manufacturing, marketing and sales organization with primary emphasis in the field of diagnostic tests for infectious diseases. The Company grants credit under normal terms to its customers, primarily to hospitals, commercial laboratories and distributors in the United States and Europe. A summary of the Company's international operations is as follows:
- ---------------------------------------------------------------------------------------------------------- 1995 1994 1993 ========================================================================================================== Net sales $5,811,000 $4,609,000 $2,930,000 Operating profit 1,233,000 801,000 462,000 Pre-tax income 979,000 579,000 446,000 Identifiable assets 4,583,000 3,904,000 2,657,000 Accounts receivable 2,538,000 2,052,000 1,313,000 Consolidated sales in thousands of dollars to individual customers constituting 10% or more of net sales were as follows:
- ---------------------------------------------------------------------------------------------------------- Years Ended September 30, 1995 1994 1993 ========================================================================================================== Customer A $6,033 (24%) $5,042 (23%) $4,254 (26%) Customer B 2,569 (10%) 2,073 (9%) 1,823 (11%)
(2) CASH AND SHORT-TERM INVESTMENTS Cash and short-term investments (with maturities of less than 4 months) are comprised of the following:
- ------------------------------------------------------------------------------------------ September 30, 1995 1994 ========================================================================================== Cash and money market funds $1,562,795 $2,865,966 Commercial paper 3,655,842 3,996,017 Corporate and municipal put bonds 3,700,000 1,970,000 - ------------------------------------------------------------------------------------------- $8,918,637 $8,831,983 - ------------------------------------------------------------------------------------------- At September 30, 1995 and 1994, the market value of the Company's investments approximated cost. The municipal put bonds are putable every seven days and the principal balance is secured by a bank letter of credit.
20 23 Meridian Diagnostics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (3) INVENTORIES
Inventories are comprised of the following: - ------------------------------------------------------------------------ September 30, 1995 1994 ======================================================================== Raw materials $1,165,319 $1,354,412 Work-in-process 626,077 649,205 Finished goods 1,241,259 1,016,454 - ------------------------------------------------------------------------ $3,032,655 $3,020,071 ========================================================================
(4) PRODUCT AND LICENSE AGREEMENT ACQUISITIONS (a) PRODUCT LINES--In January 1994, the Company acquired a product line from an affiliate of Ortho Diagnostics Systems, Inc. ('ODSI'), a subsidiary of Johnson & Johnson, comprised of products used primarily for the detection of certain infectious diseases including Chlamydia, Herpes and various viral respiratory infections. The Company also acquired inventory, equipment, certain license rights, a trademark, customer lists, a noncompetition agreement and technical information for the manufacture of the products. The purchase included $3,300,000 in cash paid to ODSI and $82,000 of expenses. As additional consideration, Meridian will pay ODSI up to 6% of product sales made during the nine-year period beginning in January 1995. The Company has recorded the estimated present value of this additional consideration (Note 5). In a separate agreement dated March 14, 1994, the Company sold to VAI Diagnostics, Inc. certain tissue culture products and assets acquired in January 1994 from the affiliate of ODSI mentioned above. The $650,000 proceeds consisted of cash of $500,000, which was paid upon execution of the agreement, and $150,000 in an unsecured promissory note due in mid-1997. No gain or loss was recognized on this transaction. Also, in June 1993, the Company acquired a product line from ODSI which consisted of the branded products MONOSPOT and MONOLERT, which are rapid tests for infectious mononucleosis. The acquisition included certain patent and trademark rights, customer lists, inventory, technical information for the manufacture of the products, certain equipment and a noncompetition agreement. The purchase included $3,100,000 in cash paid to ODSI at the acquisition date, inventory purchased at unit prices specified in the agreement which aggregated approximately $233,000 and $122,000 of expenses. As additional consideration, Meridian will pay ODSI 6% of product sales made during the three-year period beginning July 1, 1996. The Company has recorded the estimated present value of this additional consideration (Note 5). The Company also assumed ODSI's royalty obligations (equal to 4.25% of MONOLERT sales) to The Scripps Research Institute ('Scripps'). The obligation to pay royalties to Scripps expires in 2009. (b) LICENSE AGREEMENTS--The Company has entered various license agreements as follows:
- ----------------------------------------------------------------------------------------------------------------- Date Acquired Licensor/Product Term Cost ================================================================================================================= October 1993 New England Medical Center Hospital/ fifteen years $81,000 of which $25,000 E. coli Test to be offset against future royalties January 1993 Tacoma Trading Company/parasitology ten years $80,000 concentration and transport system July 1991 Texas BioResource Corp./ five years, option $100,000 to be offset against future bacterial urinary tract infection to extend for two royalties, option to purchase 25,062 test additional five-year shares of common stock which terms vests at the end of the agreement April 1991 Disease Detection International, Inc./ ten years,option to $442,000 rapid tests for the detection of strep extend for two throat, pregnancy, Toxoplasma, additional ten-year Rubella, Cytomegalovirus and Herpes terms
21 24 Meridian Diagnostics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (5) LONG-TERM OBLIGATIONS, BANK CREDIT ARRANGEMENTS AND COMMITMENTS (A) LONG-TERM OBLIGATIONS-Long-term obligations is comprised of the following at: - ----------------------------------------------------------------------------------------------------------------------
September 30, 1995 1994 ====================================================================================================================== Convertible Subordinated Debentures, unsecured, 7 1/4% annual interest payable semi-annually on March 1 and September 1, principal due September 1, 2001 $7,980,000 $11,500,000 Domestic bank notes payable, secured by real estate and accounts receivable: Interest at 5.5%, payable in monthly installments of $16,276 with a balloon payment of $32,552 in March 1996 113,932 292,969 Interest at prime +1/2% (9.25% at September 30, 1995), payable in monthly installments of $6,250 with a balloon payment of $375,000 in March 1997 481,250 556,250 Construction loan, interest at 7% to be converted to a 7%, twenty-year amortization mortgage note, payable in monthly installments of $14,878 beginning August 1996 and a balloon payment of $1,478,357 due July 2003 1,918,975 634,970 Estimated contingent consideration payable to ODSI, discounted at 7.25%, payable in quarterly variable installments, based on a percent of certain product sales, from 1995 to 2004 (Note 4) 2,163,244 2,067,149 Other 10,199 - - ---------------------------------------------------------------------------------------------------------------------- 12,667,600 15,051,338 Less-Current portion 381,932 367,969 - ---------------------------------------------------------------------------------------------------------------------- $12,285,668 $14,683,369 ======================================================================================================================
The Convertible Debentures were called for redemption on October 10, 1995. Holders of the Debentures have the option of converting their Debentures into shares of Meridian Diagnostics' common stock prior to the redemption date of November 30, 1995, at a conversion price of $5.97 per share or, upon delivery of the Debentures, receiving cash. The Debentures will be redeemed at 105% of their face amount plus accrued interest. The conversion price of $5.97 per share is equivalent to a conversion rate of 167.5 shares per each $1,000 principal amount of Debentures. Through September 30, 1995, $3,520,000 of Debentures were converted to common stock net of $186,000 of deferred debenture offering costs, which were charged to additional paid-in capital. As of November 10, 1995, $1,074,000 of Debentures were outstanding. On a pro forma basis, assuming full conversion of the Debentures as of October 1, 1994, primary earnings per share for the year ended September 30, 1995 would have been reduced by $0.01 per share from $0.29 per share to $0.28 per share. The domestic bank notes payable are part of a bank credit arrangement which also includes a $6,000,000 line of credit which calls for interest at the prime rate and is part of the same security agreement. There were no borrowings outstanding on the line of credit at September 30, 1995. In connection with the bank credit arrangement, the Company has agreed, among other things, to meet certain financial ratio requirements and to limit additional indebtedness. Maturities on the above long-term obligations are as follows: -------------------------------------------- 1996 $ 381,932 1997 771,672 1998 379,451 1999 372,479 2000 285,985 Thereafter 10,476,081 -------------------------------------------- $12,667,600 ============================================
(B) CAPITAL LEASE OBLIGATIONS--The Company leases equipment with cost and related accumulated depreciation of $259,240 and $56,953, respectively, under capital leases expiring in various years through 2002. Amortization of assets under capital leases is included in depreciation expense. 22 25 Meridian Diagnostics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The future minimum annual rentals under the capital leases at September 30, 1995 are as follows: - ----------------------------------------------------------------- 1996 $ 73,623 1997 75,325 1998 22,851 1999 22,851 2000 21,791 Thereafter 34,148 - ----------------------------------------------------------------- Subtotal $250,589 Less portion of payments representing interest (37,103) - ----------------------------------------------------------------- Present value of lease payments $213,486 =================================================================
(C) COMMITMENTS--The Company has royalty agreements with various parties which require the Company to pay a specified percentage of the sales of certain products (1% to 10%). Royalty expenses for the years ended September 30, 1995, 1994 and 1993 were approximately $408,000, $357,000 and $280,000 respectively. (6) INCOME TAXES The provision for income taxes includes the following components:
- ------------------------------------------------------------------------------------------ Years Ended September 30, 1995 1994 1993 ========================================================================================== Federal: Currently payable $1,866,090 $1,337,356 $884,296 Temporary differences- Revenue received in advance - - 18,700 Tax depreciation (less) than book depreciation (26,842) (6,800) (6,561) State franchise taxes (14,335) (26,520) 2,959 Currently nondeductible expenses (13,720) (42,745) 8,809 Intangible asset amortization (155,693) (134,627) - Other, net 117,224 (5,100) 598 - ------------------------------------------------------------------------------------------ 1,772,724 1,121,564 908,801 State and local 240,662 201,000 104,116 Foreign 422,429 219,718 198,987 - ------------------------------------------------------------------------------------------ Total provision for income taxes $2,435,815 $1,542,282 $1,211,904 ==========================================================================================
The following is a reconciliation between the statutory federal income tax rate and the effective rate derived by dividing the provision for income taxes by earnings before income taxes:
- ----------------------------------------------------------------------------------------------------------------- Years Ended September 30, 1995 1994 1993 ================================================================================================================= AMOUNT RATE Amount Rate Amount Rate Computed provision for income taxes at statutory rate $2,026,375 34.0% $1,354,357 34.0% $1,054,462 34.0% Increase/(decrease) in taxes resulting from- State and local income taxes, net of federal income tax effect 158,837 2.7 132,660 3.3 68,684 2.2 Foreign taxes 154,399 2.6 64,703 1.6 69,453 2.2 Research and experimentation tax credits - - - - (4,000) (.1) Amortization of cost in excess of net assets acquired 8,033 .1 8,033 .2 8,033 .3 Tax exempt income (38,003) (.6) (14,022) (.4) (2,608) (.1) Foreign Sales Corporation benefit (34,250) (.6) (18,333) (.4) (2,000) (.1) Officers Life lnsurance 22,384 .4 - - - - Other, net 138,040 2.3 14,884 .4 19,880 .7 - ----------------------------------------------------------------------------------------------------------------- Actual provision for income taxes $2,435,815 40.9% $1,542,282 38.7% $1,211,904 39.1% =================================================================================================================
23 26 Meridian Diagnostics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The components of the net deferred tax assets were as follows at:
- ----------------------------------------------------------------------- September 30, 1995 1994 ======================================================================= Deferred tax assets: State income taxes $ 67,966 $ 60,573 Currently nondeductible expenses 126,663 104,073 Intangible asset amortization 321,843 173,686 Other 135,455 118,283 - ----------------------------------------------------------------------- Total $ 651,927 $ 456,615 - ----------------------------------------------------------------------- Deferred tax liabilities: Depreciation (27,295) (113,845) Other (211,843) -- - ----------------------------------------------------------------------- Total $(239,138) (113,845) - ----------------------------------------------------------------------- Net deferred tax assets $ 412,789 $ 342,770 ======================================================================= No valuation allowances are recorded against deferred tax assets or deferred tax liabilities at September 30, 1995 or 1994.
(7) EMPLOYEE BENEFITS (a) SAVINGS AND INVESTMENT PLAN-The Company has a profit sharing and retirement savings plan covering substantially all full-time employees. Profit sharing contributions to the plan, which are discretionary, are determined by the Board of Directors. The plan permits participants to contribute to the plan through salary reduction. Under terms of the plan, the Company will match up to 3% of the employee contributions. Discretionary and matching contributions by the Company to the Plan amounted to approximately $273,000, $270,000, and $219,000, during 1995, 1994 and 1993, respectively. (b) STOCK OPTIONS--At September 30, 1995, 1,431,235 of the authorized but unissued common shares of the Company were reserved for issuance to directors, executives, key employees and consultants for stock options. Of the reserved shares, 773,663 were subject to options outstanding at September 30, 1995. Options may be granted at exercise prices from 95% to 110% of the market value of the underlying common stock on the date of grant and become exercisable on vesting schedules established at the time of grant. All options contain provisions restricting their transferability and limiting their exercise in the event of termination of employment or the disability or death of the optionee. Options may be granted both as Incentive Stock Options designed to provide certain tax benefits under the Internal Revenue Code and as Nonqualified Options without such tax benefits. Transactions involving the stock options are shown in the table below:
- ------------------------------------------------------------------------------------------------ Years Ended Septernber 30, 1995 1994 1993 ================================================================================================ Outstanding at beginning of period (from $1.05 to $7.57 per share) 659,715 518,580 395,671 Granted (from $4.69 to $6.42 per share) 189,188 185,422 125,413 Expired or canceled (17,817) (8,950) (517) Exercised* (57,423) (35,337) (1,987) - ------------------------------------------------------------------------------------------------ Outstanding at end of period (from $1.05 to $7.57 per share) 773,663 659,715 518,580 ================================================================================================ Exercisable at end of period (from $1.05 to $7.57 per share) 353,541 227,136 135,477 ================================================================================================ *Includes 14,574 shares surrendered in conjunction with the exercise of stock options.
(C) OTHER BENEFITS--The Company does not provide postretirement or postemployment benefits to its employees. (8) QUARTERLY FINANCIAL DATA-UNAUDITED (Amounts in thousands, except for per share data)
- ------------------------------------------------------------------------------------------------------ FOR THE QUARTER ENDED IN FISCAL 1995 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 ====================================================================================================== Net sales $5,106 $6,469 $6,782 $6,753 Gross profit 3,397 4,355 4,525 4,824 Net earnings 430 945 985 1,164 Primary earnings per common share .04 .08 .08 .09 Cash dividends per common share .02 .02 .03 .03 - ------------------------------------------------------------------------------------------------------ For the Quarter Ended in Fiscal 1994 Dec. 31 March 31 June 30 Sept. 30 ====================================================================================================== Net sales $3,625 $5,891 $5,717 $6,644 Gross profit 2,486 3,557 3,685 4,631 Net earnings 200 610 603 1,028 Primary earnings per common share .01 .05 .05 .09 Cash dividends per common share .02 .02 .02 .02
24 27 DIRECTORS WILLIAM J. MOTTO OFFICERS Chairman of the Board WILLIAM J. MOTTO JERRY L. RUYAN Chairman and Secretary Chief Executive Officer JAMES A. BUZARD, PH.D. JERRY L. RUYAN Retired Executive Vice Secretary President, Merrell Dow JOHN A. KRAEUTLER Pharmaceuticals, Inc. President, Chief Operating Officer GARY P. KREIDER Senior Partner GERARD BLAIN Keating, Muething & Vice President, Klekamp Chief Financial Officer and Treasurer ROBERT J. READY Chairman of the Board ANTONIO A. INTERNO and President, Vice President LSI Industries, Inc. CHING SUI ARTHUR YI, PH.D. Vice President, Research and Development CHRISTINA A. MEDA Vice President, Marketing Meridian Diagnostics, Inc. and Subsidiaries CORPORATE DATA CORPORATE HEADQUARTERS ANNUAL MEETING 3471 River Hills Drive The annual meeting of the Cincinnati, Ohio 45244 shareholders will be held on (513) 271-3700 Thursday, January 25, 1996 at 3:00 p.m. Eastern Time at The LEGAL COUNSEL Phoenix, 812 Race Street, Keating, Muething & Klekamp Cincinnati, Ohio. Cincinnati, Ohio SEC FORM 10-K INDEPENDENT PUBLIC A copy of the Company's ACCOUNTANTS annual report filed with the Arthur Andersen LLP Securities and Exchange Cincinnati, Ohio Commission on Form 10-K is available without charge upon TRANSFER AGENT, REGISTRAR written request to: AND DIVIDEND REINVESTMENT Gerard Blain ADMINISTRATION Chief Financial Officer The Fifth Third Bank Meridian Diagnostics, Inc. 38 Fountain Square Plaza 3471 River Hills Drive Cincinnati, Ohio 45263 Cincinnati, Ohio 45244 (800) 837-2755 COMMON STOCK INFORMATION NASDAQ National Market Systems Symbol: "KITS" Approximate number of record holders: 800 The following table sets forth by calendar quarter the high and low sales prices of the Common Stock on the NASDAQ National Market System, as adjusted for stock dividends and stock splits.
- -------------------------------------------------------- Years Ended September 30, 1995 1994 Quarter ended: HIGH LOW High Low ======================================================== December 31 5 1/8 4 3/8 6 1/2 5 1/8 March 31 6 1/2 4 5/8 7 1/8 5 3/8 June 30 7 3/8 5 5/8 6 1/8 5 September30 9 1/2 6 5 1/2 4 3/8
25 EX-23 5 MERIDIAN EX-23 1 Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our reports included in and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements File No.'s 33-38488, 33-78868 and 33-89214. ARTHUR ANDERSEN LLP Cincinnati, Ohio December 20, 1995 EX-27 6 MERIDIAN EX-27
5 U.S. DOLLARS YEAR SEP-30-1995 OCT-1-1994 SEP-30-1995 1 1,562,795 7,355,842 6,769,135 286,136 3,032,655 19,080,976 11,957,340 4,816,905 34,569,188 3,255,363 12,435,593 1,487,159 0 0 17,391,073 34,569,188 25,109,711 25,109,711 8,008,529 8,008,529 10,525,326 286,136 1,134,844 5,959,926 2,435,815 3,524,111 0 0 0 3,524,111 .29 .28
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