-----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, F5St9XdLWvhS2KsW1iqeUCjiB7H2GMZ3raY3PpJyvqkO8+IW8JktHToPoFMslQw6 sYib7rCwZoVDOz8dCiN70g== /in/edgar/work/0000912057-00-045897/0000912057-00-045897.txt : 20001026 0000912057-00-045897.hdr.sgml : 20001026 ACCESSION NUMBER: 0000912057-00-045897 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000731 FILED AS OF DATE: 20001025 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERIDIAN MEDICAL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000095676 STANDARD INDUSTRIAL CLASSIFICATION: [3841 ] IRS NUMBER: 520898764 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-05958 FILM NUMBER: 745880 BUSINESS ADDRESS: STREET 1: 10240 OLD COLUMBIA RD STREET 2: STE 100 CITY: COLUMBIA STATE: MD ZIP: 21046 BUSINESS PHONE: 4103096830 MAIL ADDRESS: STREET 1: 10240 OLD COLUMBIA ROAD CITY: COLUMBIA STATE: DE ZIP: 21046- FORMER COMPANY: FORMER CONFORMED NAME: SURVIVAL TECHNOLOGY INC DATE OF NAME CHANGE: 19920703 10-K 1 a2028635z10-k.txt 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended JULY 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ___________. Commission File Number 0-5958 MERIDIAN MEDICAL TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 52-0898764 - --------------------------------- --------------------------------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 10240 OLD COLUMBIA ROAD, COLUMBIA, MARYLAND 21046 - ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 410-309-6830 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.10 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 any amendment to this Form 10-K. [X] As of October 2, 2000, the aggregate market value of voting stock held by non-affiliates of the Registrant, based on the average of the high and low sales prices of such stock reported by the National Association of Securities Dealers, Inc. on such date, was approximately $56.1 million. There were 3,012,360 shares of Registrant's common stock outstanding as of October 2, 2000 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Meridian Medical Technologies, Inc. definitive Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended July 31, 2000 are incorporated by reference into Part III of this Form 10-K. ================================================================================ Page 1 of 55 2 TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. BUSINESS General 4 Products and Services 5 Pharmaceutical Systems 5 Cardiopulmonary Systems 9 Competition 11 Backlog 12 Patents, Trademarks, and Licenses 12 Product Liability Insurance 12 Sources and Availability of Raw Materials 13 Government Regulation 13 Employees 14 ITEM 2. PROPERTIES 15 ITEM 3. LEGAL PROCEEDINGS 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 EXECUTIVE OFFICERS OF THE REGISTRANT (UNNUMBERED ITEM) 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 17 ITEM 6. SELECTED FINANCIAL DATA 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
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PAGE ---- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 45 PART III ITEMS 10. THROUGH 13. (Incorporated by reference from the definitive Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended July 31, 2000, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of that fiscal year) PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K 44 SIGNATURES 50 EXHIBIT INDEX 51
FORWARD LOOKING STATEMENTS This report and other written and oral statements made by the Company may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act with respect to financial performance and other financial and business matters. Forward-looking statements are typically identified by future or conditional verbs or similar expressions regarding events that have yet to occur. These forward-looking statements are based on the Company's current expectations and are subject to numerous assumptions, risks and uncertainties. The following factors, among others, could cause actual results to differ materially from forward-looking statements: economic and competitive conditions; capital availability or costs; fluctuations in demand for the Company's products; government procurement timing and policies; technological challenges associated with the development and manufacture of the Company's products; commercial acceptance of the Company's products; delays, costs and uncertainties associated with clinical testing and government approvals required to market new drugs and medical devices; availability and quality of raw materials; success and timing of cost reduction and quality enhancement programs; regulatory and contract compliance; relationships with significant customers; adequacy of product liability insurance; ability to obtain, timing and success of marketing representatives and strategic alliances; and adequacy of intellectual property protection. Meridian assumes no duty to update forward-looking statements. 4 PART I ITEM 1. BUSINESS GENERAL Meridian Medical Technologies, Inc. (hereinafter referred to as the "Company" or "MMT" or "Meridian") is a medical technology company operating in two segments: Pharmaceutical Systems and Cardiopulmonary Systems. PHARMACEUTICAL SYSTEMS - The Pharmaceutical Systems segment consists of the Commercial Systems and Government Systems businesses, both of which utilize the Company's auto-injector technology. The principal source of Commercial Systems revenue currently is the EpiPen(R) family of auto-injectors, which are prescribed for severe allergic reactions and other causes of anaphylaxis. The Company expects, over the coming years, to realize significant revenue growth from new commercial applications of its auto-injector products. Additionally, revenue growth is anticipated from alliances that introduce new products in auto-injectors and other drug delivery devices. Current new therapies under development or in negotiations for delivery in auto-injectors include glucagon for hypoglycemia and an anti-seizure drug for management of breakthrough seizures. Government Systems revenues are principally generated from auto-injector products and services marketed to the U.S. Department of Defense (DoD), and other federal, state, local, and foreign governments. Marketing efforts from this unit will focus on maintaining the Industrial Base Maintenance Contract with the U.S. Department of Defense, as well as expanding international markets and domestic preparedness applications. CARDIOPULMONARY SYSTEMS - The Cardiopulmonary Systems segment utilizes the Company's electrocardiology and telemedicine technologies. Telemedicine sales currently are the principal source of revenue. In fiscal 2000, the Company introduced its PRIME ECG(TM) electrocardiac mapping system after several years of development. Management believes that PRIME ECG has the potential to become the standard ECG system of the future and to generate significant revenues and profits for the Company. 5 PRODUCTS AND SERVICES Revenues from MMT's two segments and gross profit for the years ended July 31, 2000, 1999, and 1998 are as follows (in thousands):
Year Ended July 31, 2000 1999 1998 ------------- ------------- ------------ Pharmaceutical Systems Commercial Systems $ 27,036 $ 14,405 $ 22,414 Government Systems 26,070 24,485 21,165 ------------- ------------- ------------ 53,106 38,890 43,579 Cardiopulmonary Systems 1,501 1,840 1,089 ------------- ------------- ------------ Total Revenues 54,607 40,730 44,668 Gross Profit 22,016 12,710 17,577 Gross Profit % 40.3% 31.2% 39.4%
Commercial Systems revenues in fiscal 1999 and 1998 above were adversely impacted by the 1998 EpiPen recall. See Item 7 - Management's Discussion and Analysis for further discussion. PHARMACEUTICAL SYSTEMS The Company pioneered the development of auto-injectors for the self-administration of injectable drugs. An auto-injector is a prefilled, pen-like device that allows a patient to automatically inject a precise drug dosage quickly, safely, and reliably. Meridian manufactures a spring-loaded, needle based auto-injector. These auto-injectors are a convenient, disposable, one-time use drug delivery system designed to improve the medical and economic value of many drug therapies. The product is well-suited for the administration of certain drugs and is currently marketed with epinephrine for the treatment of allergic reactions, lidocaine for the treatment of cardiac arrhythmias, morphine for the management of pain, diazepam for the treatment of seizures, and antidotes for the treatment of nerve agent exposure. The auto-injector offers a common delivery system platform that can be used for both commercial and government new product needs. It is anticipated that the Company's initial new product range will be based on its auto-injector delivery systems but over time will expand to include other innovative product technologies currently under development. MMT also supplies customized drug delivery system design, pharmaceutical research and development and FDA current Good Manufacturing Practice (cGMP)-approved sterile product manufacturing to pharmaceutical and biotechnology companies. COMMERCIAL SYSTEMS MMT currently manufactures the EpiPen and other commercial auto-injectors, provides contract research and development, and performs pharmaceutical manufacturing for some of the leading pharmaceutical and biotechnology companies. Utilizing its sterile product manufacturing and cartridge filling capabilities, MMT focuses on providing customized drug delivery systems to its customers. 6 a. EXISTING PRODUCTS Currently, a substantial majority of the Company's commercial sales come from its EpiPen epinephrine auto-injectors, which are prescribed to patients at risk of anaphylaxis resulting from severe allergic reactions to insect stings or bites, foods, drugs and other allergens, as well as idiopathic or exercise induced anaphylaxis. EpiPen is available in two dosage strengths, and permits the immediate self-injection of epinephrine, the drug of choice for emergency treatment of such conditions. The EpiPen was the Company's first major commercial auto-injector, and demand for the EpiPen continues to be strong due to increased awareness of the health risks associated with allergic reactions. The Company markets the EpiPen through Dey L.P., a subsidiary of E. Merck based in Germany. Dey Laboratories has a marketing agreement with ALK, Inc., a Danish company, for international markets in 13 foreign countries, and with Allerex in Canada. b. PHARMACEUTICAL MANUFACTURING AND PACKAGING The Company has complete sterile parenteral pharmaceutical manufacturing and packaging capabilities for a broad range of sterile injectable dosage forms which includes vials, cartridges, pre-filled syringes, and auto-injectors. Further, the Pharmaceutical Systems business provides fully validated formulation and aseptic filling services and regulatory and clinical trial assistance for pharmaceutical and biotechnology companies not currently possessing such capabilities or requiring outside support. The Company also supplies customized drug delivery system design, cGMP-approved sterile product manufacturing and pharmaceutical research and development to a number of different companies. Development programs include feasibility and stability studies as well as the manufacturing of clinical trial materials in the Company's pilot plant. If feasibility and stability studies are successful and all regulatory approvals are received, the Company anticipates licensing fees and contracts in the coming years to manufacture these products in vials, prefilled syringes and proprietary auto-injector systems. Revenue from customer-funded research and development activities was $1.5, $1.8 and $1.3 million during fiscal years 2000, 1999 and 1998, respectively. The Company expects fiscal 2001 revenue from funded R&D activities and licensing fees to increase. The Company currently has commercial manufacturing agreements with Schering Plough and Mylan Labs. In 1997, the Company formed a long term strategic alliance with Mylan Laboratories ("Mylan") under which Meridian will license, develop and manufacture a line of generic injectable drugs to be marketed by Mylan. Sales revenue from Mylan has been modest to date. c. POTENTIAL NEW PRODUCTS The Company continues to explore additional pharmaceutical products to further capitalize on its auto-injector technologies. These will be products that usually require emergency administration and where the patient or caregiver will benefit by administration with an auto-injector. Such products are anticipated to be developed internally or acquired outside and will be manufactured utilizing the Company's existing technology and facilities. The Company anticipates it will develop the necessary sales and marketing organization to support the products. GOVERNMENT SYSTEMS The Government Systems business unit supplies auto-injector-based antidotes and emergency medicine products to military and civilian organizations and has recently expanded its sales activities to include major countries throughout the world. MMT's major Government Systems customer continues to be the DoD. Through a combination of the Industrial Base Maintenance Contract and new product development contracts, MMT expects to maintain a strong and stable business relationship with the DoD. MMT plans to capitalize on the auto-injector delivery systems developed for government applications to 7 expand Government Systems revenue and provide new drug delivery technology for application in its commercial business unit. The Company continues to advance its multichambered auto-injector which provides a two chamber technology for the enhanced absorption of two incompatible drug compounds from the same injection site. The auto-injector is currently in advanced development for the US military, and other governments have expressed interest in this innovative delivery system for their antidote formulations. The Company also has an auto-injector in early development that has both a dry chamber and a wet chamber for rapid administration of drugs that have poor stability in solution. Currently fielded products for the U.S. include: the AtroPen, containing atropine, ComboPen containing pralidoxime, both used as nerve agent antidotes; a morphine containing auto-injector for pain management; and a ComboPen containing diazepam for seizure management. These auto-injectors are intended for use primarily by military personnel but are also now available for use by first responders as antidotes to counteract the effects of exposure to highly toxic chemical warfare nerve agents. a. U.S. DEPARTMENT OF DEFENSE The Company has been the supplier of auto-injectors to the DoD for many years. DoD procurements of auto-injectors are restricted to qualified producers and the FDA must approve all products. The Company is currently the only FDA-approved and the only qualified producer for all DoD military auto-injectors. The Company's auto-injectors are classified as critical "war stopper" items by the DoD and have been the subject of an Industrial Base Maintenance Contract ("IBMC") between the Company and the DoD since 1992. This contract is part of a program by the DoD to ensure adequate supplies of critical items in the event of armed conflict. This innovative contract calls for production of auto-injectors filled with nerve agent antidotes, the retention by the Company of key personnel and facilities to assure expertise for manufacturing auto-injectors containing nerve agent antidotes, the management of the U.S. Army's Shelf Life Extension Program, and the pre-stocking of critical components to enhance readiness and mobilization capability. A surge capability provision allows for the coverage of defense mobilization requirements in the event of rapid military deployment. During fiscal 1999, MMT concluded negotiations with the DoD for its third IBMC beginning August 1, 1999. This contract includes renewal options for two additional years through July 31, 2002. The DoD renewed the option for the second year of the contract in fiscal 2000. Revenues under this contract have ranged from $13 to $21 million over each of the last three years and are expected to exceed $15 million per year under the current contract. The Government Systems business unit plans to build upon its strong relationship with the DoD and remain the source of first choice for military auto-injector products. To that end, the Company continues to maintain leadership by introducing new products into this market. New products include the Multi-chambered Auto-injector ("MA") delivery system specifically developed for the U.S. Army. This system will allow military personnel to use a single auto-injector to sequentially administer the specified antidotes under battlefield conditions. The MA is expected to receive FDA approval by December 2000, with customer shipments expected during the third fiscal quarter of MMT's fiscal 2001 b. INTERNATIONAL The Company will continue its strategy of seeking to expand its international military sales into new markets worldwide as a principal supplier of critical life saving antidotes for chemical warfare defense. The foreign government customer base includes many allied countries in Europe, the Middle East and the Far East. International government sales for fiscal 2000, 1999 and 1998 were $7.8, $2.5 and $1.6 million, respectively. 8 The product range for the international community includes the same type auto-injectors and antidote formulations as used by the U.S. community, however, it also includes a number of variations to address the formulation specific requests of client countries. During fiscal 1999, the Company was granted a Product License - Marketing Authorization by the German Federal Institute for Medicinal Drugs and Medicinal Products for its atropine-filled auto-injectors ("AtroPen"). This approval also allows MMT to expand the marketing of the AtroPen under the European Mutual Recognition Procedures to supply allied armed forces throughout Europe. c. CIVIL DEFENSE - DOMESTIC PREPAREDNESS The demand for nerve agent antidote auto-injectors has recently expanded to include growing numbers of state agencies and local communities, for domestic preparedness purposes in response to potential terrorist attacks and as protection for populations in high risk areas. At the request of several government agencies, state and local experts have formed the MMRS (Metropolitan Medical Response System), which includes training and equipping emergency teams as initial, on-site responders. This concept has a goal to develop MMRS in the 120 most populous metropolitian areas in the U.S. in the next five years. The Company believes that this is essentially an untapped market with a significant growth potential. While revenues to date have not been material, the Company believes that enhanced awareness of the Company and its products could result in increased contributions. RESEARCH AND DEVELOPMENT With the intent of developing and commercializing its own family of pharmaceutical products, Meridian is looking to both its own technologies and those technologies within the industry that can be brought into the Meridian product range. The general thrust initially will be towards products that have emergency medicine applications such as anti-convulsants, management of hypoglycemia and antidotes for drugs of abuse. Several military-developed products currently in production are being considered for their application into the commercial arena using existing auto-injector applications. Currently, improved auto-injector configurations are also being considered as well as drug products outside of Meridian's traditional market applications. Product development emphasis will be placed on those products that would have market applications in both the commercial and government sectors. The Company expensed $2.9 million, $1.2 million and $1.3 million on research and development activities in fiscal 2000, 1999, and 1998, respectively, excluding costs associated with customer-funded projects. The Company expects research and development expenditures in fiscal 2001 to be higher than the fiscal 2000 level. While not engaged in basic research, Meridian does have both externally and internally funded development efforts. The externally funded programs involve activities that include the formulation and sterile filling of developmental products for commercial customers and new product development of military injectables. The later development activities include new auto-injector delivery systems, drug formulations, assay developments, clinical studies and regulatory submissions. Internally funded activities include the development of new pharmaceuticals that will be marketed by MMT. Initially MMT's new product line will be developed using drug compounds whose safety and efficacy have already been established and placing these compounds in the Company's basic auto-injector delivery systems. As the product range is expanded, new product opportunities may evolve utilizing alternate delivery systems and drug compounds obtained through acquisitions and/or joint ventures. Commercial customer product programs include feasibility and stability studies as well as the manufacturing of clinical trial materials in the Company's pilot plant. If feasibility and stability studies are successful and all regulatory approvals are received, the Company anticipates licensing fees and contracts in the coming years to manufacture these products in vials, prefilled syringes and proprietary 9 auto-injector systems. The Company has signed a feasibility contract with a major European country to develop the MA auto-injector incorporating its antidote formulation. The second phase of this program is currently being negotiated which could result in a full scale development effort that, if successful, could lead to product registration in Europe as early as FY2003. This product registration would allow the Company to negotiate a licensing agreement to permit the sale of this product to major NATO countries. With the renewed interest by a number of NATO countries in the nerve agent antidote HI-6, Meridian's technology group has begun work to develop a specialized auto-injector that could be used to administer this antidote. HI-6 has only a short shelf-life when in solution which necessitates an auto-injector that contains individual chambers separating the drug and the diluent. Prior efforts by others have resulted in auto-injectors that are cumbersome, difficult to manufacture and use, and expensive. Meridian has developed several prototype units that meet the performance requirements expected while being easier to make, are less bulky and provide ease of use. Negotiations are underway to seek multi-national funding to complete the development of this innovative auto-injector. MMT also has Truject, a single-chambered auto-injector for subcutaneous injection which utilizes a very thin (27 gauge) needle, under development for potential new applications. This new auto-injector is designed for use in emergency situations and for any episodic treatment where a subcutaneous injection is the preferred drug delivery route. This new auto-injector will be subject to clinical testing and regulatory approval prior to the product reaching the marketplace. See "Government Regulation" below. CARDIOPULMONARY SYSTEMS The Company's Cardiopulmonary Systems unit is focused on the development and sale of non-invasive cardiopulmonary diagnostic products. In addition to a line of telemedicine products, the Company has completed the development phase of its innovative PRIME ECG electrocardiac mapping system and has introduced the product for sale in a number of countries. a. PRIME ECG(TM) ELECTROCARDIAC MAPPING SYSTEM The PRIME ECG system is a unique electrocardiac mapping system developed in collaboration with university and medical school researchers. This system offers the potential to significantly improve the diagnosis and treatment of heart disease, which affects over 13 million people in the U.S. alone, including 1.5 million heart attack victims each year. The PRIME ECG system consists of a patented 80-lead disposable electrode vest, 80-channel recording module, computer assisted analysis software and a full color multi-dimensional graphic display. The system initially has been introduced for the early detection of acute myocardial infarction ("AMI") or heart attack. European clinical tests conclude that the PRIME ECG system can allow earlier and more accurate diagnosis of AMI for significantly more patients than the standard 12-lead ECG. Further, the PRIME ECG system displays results in a manner that can allow the clinician to identify the nature of the infarct, which can be utilized in determining the most effective course of treatment. Without early and accurate diagnosis of AMI, potentially life-saving treatment is delayed for AMI victims. For non-AMI chest pain patients, unnecessary tests and hospital admissions to rule-out AMI are estimated to cost health care systems and individuals billions of dollars each year. The Company anticipates that the clinical and economic benefits of this new system can create the opportunity for the Cardiopulmonary Systems business to become a prominent participant in the electrocardiography market in future years. 10 The Company expects the PRIME ECG(TM) system will be used initially by the emergency room physician who needs faster and more accurate diagnosis for more than 20 million chest pain patients each year. The Company is pursuing additional applications where this technology may enhance detection and/or treatment of heart conditions known to affect the electrophysiology of the heart. Potential applications include the ability to detect changes in reperfusion of the coronary arteries following intervention. The use of serial recordings has been shown to allow detection of reduced flow before this condition becomes critical. This may prevent potentially life threatening and costly emergencies. The Company in unaware of a non-invasive alternative means to detect this condition. Other potential applications involving arrhythmia management and sudden cardiac death are being investigated. The Company estimates that the market size for the potential use of PRIME ECG is substantial, with the total combined markets for diagnosis of AMI and other applications exceeding $6 billion annually. The use of the PRIME ECG system requires purchase of a disposable electrode array or vest. This patented, simple to use device is expected to provide a recurring source of revenue to the Company, which anticipates that it will be the sole manufacturer. The Company projects that the disposable electrode vest design can be modified to meet a range of applications, allowing lower cost and greater convenience in potential future applications. The PRIME ECG system received the CE Mark from European authorities during fiscal 1999. To date, the Company has signed representation agreements with companies to market PRIME ECG in Italy, Austria, Denmark, Switzerland, Poland, Hungary, Spain, Portugal and Australia. The Company sells PRIME ECG directly in the United Kingdom and is actively negotiating with additional candidates to service the remaining European markets. Initial shipment of the product was made in fiscal 2000 and additional orders have been shipped in the first quarter of 2001. The Company is sponsoring a multi-center clinical study that is designed to demonstrate superior performance compared to the 12-lead ECG. The study is ongoing at the Medical College of Virginia in Richmond and Maine Medical Center in Portland. The University of Cincinnati and the Manchester Heart Center will be added during the early months of fiscal 2001. These are expected to generate the necessary evidence to support the Company's planned 510(k) filing with the FDA, targeted for early calendar 2001. Subject to gaining FDA approval, the introduction of PRIME ECG in the U.S. is targeted for 2001. 11 B. TELEMEDICINE PRODUCTS The Company is a leader in the development of devices that measure and transmit diagnostic information by telephone. These products allow a patient's condition to be monitored while at home, which can reduce expensive office visits, allow for earlier diagnosis and minimize emergency room and hospital admissions. Meridian's CB-12L CardioBeeper-R- electronic heart monitor transmits a standard 12-lead electrocardiogram ("ECG") by telephone. A new heart monitor, the CardioPocket(TM) was introduced in 1999, providing unprecedented convenience by incorporating a miniaturized single-lead version into a wallet. The CardioPocket was awarded a Millennium Product Award for innovation and creativity in the U.K. from the Design Council of Britain, and has already been purchased by more than 15,000 users. In 2000, the Company completed development of the CB12/12, a next generation CB12L that is more convenient and faster than its predecessor. The telemedicine product line is sold by Shahal Medical Services, Ltd. ("Shahal"), which has exclusive international marketing rights. Shahal, based in Israel, is a home healthcare monitoring company serving more than 60,000 subscribers. Last year, Shahal formed SHL International for the purpose of accelerating its program to expand its business to other countries with a focus in Europe and the United States. C. RESEARCH & DEVELOPMENT The Company invested $1.4 million in Cardiopulmonary Systems research & development in fiscal 2000. The majority of this expenditure was dedicated to the PRIME ECG system and included design of dedicated hardware and software systems, as well as the funding of certain university research projects selected for their potential to lead to new and improved applications. The Company intends to continue to invest in PRIME ECG, projecting overall increased expenditures in fiscal 2001. These development investments include algorithm enhancement to further improve heart attack detection, software development to provide new applications such as reperfusion, hardware development to provide portability and reduce costs, and graphics enhancements to further improve ease of interpretation, in addition to increased sales and marketing expenditures. COMPETITION In the commercial auto-injector market, the Company competes directly with companies that manufacture drug injection devices, whether such devices are automatic like the Company's products or non-automatic, variable dose pen-like injection devices, reloadable injection devices and disposable needle-free injection systems. The Company is the leading manufacturer of automatic injectors in the world. The Company expects competition to intensify. Meridian is the sole supplier of auto-injectors to the U.S. Government for military use, and effective August 1, 1999, renewed its three-year base maintenance contract (an initial base year and two option years, the first of which has been exercised in fiscal 2000) with the U.S. Department of Defense. The Company competes with a small number of companies selling to foreign military markets. The Company's pharmaceutical manufacturing and packaging services operate in an intensely competitive field that is presently dominated by larger pharmaceutical companies. There are numerous other disposable, prefilled syringe systems presently available which can be less expensive than those offered by the Company. A small group of independent companies and a few pharmaceutical companies offer contract syringe filling services similar to those that the Company offers. The Cardiopulmonary business operates in a highly competitive sector of the healthcare industry. Meridian's telemedicine products compete against the products of numerous other companies. The 12 PRIME ECG-TM- product will compete with existing diagnostic equipment and testing procedures such as blood markers for detection of AMI, and potentially with products and technologies currently under development that may be brought to market, such as enhanced 12-lead ECG algorithms, invasive cardiac mapping and improved cardiac stress testing. BACKLOG As of July 31, 2000, the backlog of orders was approximately $17.0 million, of which $5.2 million related to production and delivery of commercial products and services, and $11.8 million related to military products and the IBMC contract. This compares with commercial product sales backlog of $6.2 million and a military backlog of $13.5 million, for a total of $19.7 million at July 31, 1999. PATENTS, TRADEMARKS, AND LICENSES The Company considers its proprietary technology to be important in the development, marketing and manufacture of its products and seeks to protect its technology through a combination of patents and confidentiality agreements with its employees and others. Patents covering important features of the Company's current principal auto-injector products have expired. This loss of patent protection could have an adverse effect on the Company's revenues and results of operations. MMT is currently developing a new generation of auto-injector products (see "Research and Development") for which a number of patents have been granted to the Company. Over the last few years, the Company was granted U.S. patent protection for several of its new auto-injector drug delivery systems, designed for fast and reliable patient self-administration of the expanding range of new pharmaceutical and biotechnology products that require injection. Some of these patents cover the multi-chambered auto-injector (MA) expected to be launched in fiscal 2001. The MA patents cover various components running through 2010. In addition, the Company holds several patents and licenses on the PRIME ECG(TM) electrocardiac mapping system, including the patent on the PRIME ECG disposable electrode vest. Most of the other patents are licensed from the Northern Ireland Bioengineering Center at the University of Ulster in Northern Ireland for a minimum remaining term of 17 years. The Company intends to file for additional protection for its new auto-injector and cardiopulmonary products currently under development. The new auto-injector products are expected to replace or supplement the Company's existing line of auto-injectors over time. PRODUCT LIABILITY INSURANCE The Company maintains product liability coverage for its products aggregating $40 million. The Company will continue to maintain liability insurance as it relates to divested operations to cover potential claims incurred but not reported prior to their disposition. Although the Company's management is of the opinion that, with respect to amounts, types and risks insured, the insurance coverage is adequate for the business conducted by the Company, there can be no assurance that such insurance will provide sufficient coverage against any or all potential product liability claims. 13 SOURCES AND AVAILABILITY OF RAW MATERIALS The Company purchases, in the ordinary course of business, necessary raw materials, components and supplies essential to the Company's operations from numerous suppliers in the U.S. and overseas. Several of the ingredients used in the antidote formulations are unique and require highly specialized synthesis facilities, consequently, limited amounts of these ingredients are available from time to time. Auto-injector components also require specialized tooling and by commercial manufacturing standards are considered low volume production. Cardiopulmonary product components availability are subject to worldwide demand within the electronics industry. Component requirements frequently compete with high volume, high demand vendor manufacturing time. The Company monitors these situations carefully to ensure a continued supply of both raw materials and components. The Company procures inventory principally when supported by customer purchase orders. GOVERNMENT REGULATION The business of the Company is highly regulated by governmental entities, including the FDA and corresponding agencies of states and foreign countries. The summary below does not purport to be complete and is qualified in its entirety by reference to the complete text of the statutes and regulations cited herein. As a manufacturer of auto-injectors, cardiopulmonary products, vials and pre-filled syringes, the Company's products are subject to regulation by the FDA under the Federal Food, Drug and Cosmetic Act ("Act"). All of the Company's auto-injectors are "new drugs" and may be marketed only with the FDA's approval of a New Drug Application "NDA" or a supplement to an existing NDA. The Company currently holds approved NDAs for each of its existing auto-injector products. The use of the Company's existing auto-injectors to administer another FDA approved drug generally would require the filing of a NDA, supplement to an existing NDA or an Abbreviated New Drug Application ("ANDA"). In addition, the introduction of the Company's new generation auto-injectors will require FDA approvals based on data demonstrating the safety, effectiveness, and/or bioequivalence of the drug delivered by these auto-injectors. There is no assurance that the NDAs will be processed in a timely manner or that FDA ultimately will approve such NDAs. The Company's prefilled syringe systems are also regulated as drugs; however, the requisite FDA approval is held by the supplier of the drug that the Company fills into the syringe. To the extent the Company's auto-injector and syringe systems are expected to be used to administer new drugs under development, FDA approval to market such drugs first must be received by the pharmaceutical manufacturer. Obtaining the requisite FDA approval is a time consuming and costly process through which the manufacturer must demonstrate the safety and effectiveness of a new drug product. Once acquired, this approval is specific to company and manufacturing sites. The Company's Cardiopulmonary Systems Products must have FDA Registration for U.S. sales and CE Marking for European sales. In connection with its manufacturing operations, the Company must comply with cGMP regulations, and its manufacturing facilities are subject to periodic inspections. The Company's St. Louis facility has undergone multiple routine, satisfactory inspections by the United States, the United Kingdom, and the Republic of Germany of both the facilities as well as individual drug products manufactured there in 2000, 1999, and 1998. Suppliers of bulk drugs for filling into the Company's drug delivery systems, as well as subcontractors that manufacture components for the Company's medical devices, also are subject to FDA regulation and inspection. The Company has only limited control over these other companies' compliance with FDA regulations. Failure of these companies to comply with FDA requirements could adversely affect the 14 Company's ability to procure component parts, market finished products and may cause the Company's products made with non-compliant components to be adulterated or misbranded in violation of the Act, subjecting the products to a variety of FDA administrative and judicial actions. The FDA is empowered with broad enforcement powers. The FDA may initiate proceedings to withdraw its approval for marketing of the Company's product should it find that the drugs are not manufactured in compliance with cGMP regulations, that they are no longer proven to be safe and effective or that they are not truthfully labeled. Noncompliance with cGMP regulations also can justify nonpayment of an existing government procurement contract and, until the deficiencies are corrected to FDA's satisfaction, can result in a nonsuitability determination, precluding the award of future procurement contracts. For any of the Company's auto-injectors and syringe systems, noncompliance with FDA regulations could result in civil seizure of the drugs, an injunction against the continued distribution of the drugs or criminal sanctions against the Company. The Company's medical devices also are subject to seizure by the FDA through administrative or judicial proceedings. In addition, the FDA may impose civil money penalties for most violations of law and may order that defective devices be recalled, repaired or replaced or that purchasers be refunded the cost of the device. Certain states have instituted needle protection standards. Presently, to the best of the Company's knowledge, the Company's products are not covered by these standards. The applicability of these needle protection standards in the future could require the Company to change its product design and production methods. The Company also is subject to regulation by other federal and state agencies under various statues, regulations and ordinances, including environmental laws, occupational health and safety laws, labor laws and laws regulating the manufacture and sale of narcotics. The Company's supply contracts with the DoD are subject to post-award audit and potential price redetermination. From time to time, the DoD makes claims for pricing adjustments with respect to completed contracts. At present, no claims are pending. All U.S. Government contracts provide that they may be terminated for the convenience of the Government as well as for default. Upon termination for convenience of cost reimbursement type contracts, the Company would be entitled to reimbursement of allowable costs plus a portion of the fixed or target fee related to work accomplished. Upon termination for convenience of fixed-price contracts, the Company normally would be entitled to receive the contract price for items which have been delivered under the contract, as well as reimbursement for allowable costs for undelivered items, plus an allowance for profit thereon or adjustment for loss if completion of performance would have resulted in a loss. The Company anticipates no such contract terminations. EMPLOYEES As of September 30, 2000, the Company employed a total of 342 employees: 267 employees work at the Company's plant and warehouse facilities in St. Louis, Missouri; 43 employees work at the facility in Belfast, Northern Ireland, and 32 employees work at the Company's corporate headquarters in Columbia, Maryland (see "Properties"). Effective March 1, 1999, the Company entered into a three-year agreement with the Teamsters Local Union No. 688 ("Teamsters") which is affiliated with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America. Teamsters are the exclusive agent for all production and maintenance employees of the Company at its St. Louis facility. Approximately 148 employees are covered by this collective bargaining agreement. 15 ITEM 2. PROPERTIES The Company's corporate headquarters are located in an 11,000 square foot facility in Columbia, Maryland. The facility is leased through 2002. The corporate headquarters facility houses the corporate administration, human resources, finance, commercial business development, government programs, and the product design and development functions. Meridian had entered into a ten-year lease expiring in 2002 on a 17,000 square foot facility in Rockville, Maryland, which previously served as the Company's headquarters. The Rockville, Maryland facility has been sub-leased to a third party through 2002. The Company's primary R&D and pharmaceutical operations are located in St. Louis, Missouri. These facilities are used primarily for formulation, stability testing, aseptic filling, assembly and final packaging of the Company's auto-injectors, vials and pre-filled syringes. The St. Louis manufacturing facilities consist of eight separate buildings occupying over 100,000 square feet. In fiscal 1999, the Company opened a new facility in Belfast, Northern Ireland, and consolidated the operations previously performed at the Antrim, N. Ireland and Rochester, Kent England facilities. The 28,000 square foot facility is designed to develop and produce innovative technology products for its Cardiopulmonary Systems Group, including the PRIME ECG(TM) system, and supply auto-injectors for the Government Systems Group for sale to international markets. The Company is leasing the new facility under a lease expiring in 2014. The Company has a 4,200 square foot facility in Rochester, Kent in the United Kingdom previously used for aseptic assembly and packaging of auto-injector product under contracts with foreign countries. This facility was also used as a sales and marketing office to promote the Company's commercial and military products in Europe and the Middle East. The facility is leased pursuant to a lease that expires in 2010, and the Company has sub-leased the facility to a third party through 2003. The operations of the Rochester facility were consolidated with the Antrim, N. Ireland facility into the new Belfast facility in fiscal 1999. ITEM 3. LEGAL PROCEEDINGS Lawsuits and claims are filed from time to time against the Company and its subsidiaries in the ordinary course of business. Management of the Company, after reviewing developments to date with legal counsel, is of the opinion that the outcome of such matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted by the Company during the fourth quarter of fiscal 2000 to a vote of security holders, through the solicitation of proxies or otherwise. EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists, as of September 30, 2000, the names and ages of all executive officers of the Company, and their positions and offices held with the Company
NAME AGE PRESENT POSITIONS WITH THE COMPANY - ---- --- ---------------------------------- James H. Miller 62 Chairman, President and Chief Executive Officer Gerald L. Wannarka 61 Senior Vice President, Technology and Government Systems Robert J. Kilgore 50 Senior Vice President, General Manager, Pharmaceutical Systems Dennis P. O'Brien 42 Vice President, Finance and Chief Financial Officer Peter A. Garbis 59 Vice President, Organization Development
MR. MILLER joined the Company as President in June 1989, was elected Chief Executive Officer in June 1990 and was elected Chairman of the Board in April 1996. Prior to joining the Company, Mr. Miller served as Executive Vice President of Beecham Laboratories from February 1987 to May 1989, responsible for the Pharmaceutical and Animal Health Divisions. Prior to joining Beecham, Mr. Miller spent ten years with Frank J. Corbet Inc. (healthcare advertising agency) as Executive Vice President and fourteen years in marketing management with Abbott Laboratories. DR. WANNARKA joined Meridian in December 1997 as Vice President, Technology and Government Systems and was promoted to Senior Vice President in September 1998. Dr. Wannarka is a former US Army Medical Service Corps Officer retiring in 1992 at the rank of Colonel. While on active duty, Dr. Wannarka had responsibilities in research, research management and FDA regulatory affairs, and served in positions of gradually increasing responsibility such as: Project Manager, Pharmaceutical Systems, Deputy Director, USA Medical Research Institute of Chemical Defense, and Director, Clinical Investigation Program, US Army Health Services Command. Since retiring from the military, he has held positions as Vice President, Research and Development, for DPT Laboratories and Coloplast Corporation. He has conducted research with therapeutics for high-hazard virus infections, medical chemical defense, topical therapeutics and drug delivery to include auto-injectors, transdermal, inhalation, sustained release oral and parenteral systems. MR. KILGORE joined Meridian in April 2000 as Senior Vice President, General Manager Pharmaceutical Systems. From January 1997 to March 2000, Mr. Kilgore was Director of Marketing and Business Development for Becton Dickinson Pharmaceutical Systems. There he was also responsible for worldwide licensing activities including sales and marketing activities associated with Becton Dickinson Advanced Injection Systems, which focused on new delivery technology for the delivery of parenteral pharmaceuticals. Prior to his position at Becton Dickinson, Mr. Kilgore was Director of Business Development at Reed & Carnrick Pharmaceuticals where he negotiated several major strategic alliances with multi-national pharmaceutical companies and has held marketing management positions with Schering Plough and Winthrop Pharmaceuticals. MR. O'BRIEN joined Meridian in March 1999 as Vice President, Finance and Chief Financial Officer. Prior to joining Meridian, he was Vice President of Finance and Chief Financial Officer of Ogden Environmental & Energy Services Co., Inc. from 1996 to February 1999. Previous positions held by Mr. O'Brien include Vice President of Finance/Chief Financial Officer positions of After Six, Ltd. and Tate Global Corporation from 1990 through 1996. Prior to joining Tate, Mr. O'Brien was with Flow Laboratories, Inc., a biomedical products supply company, and KPMG Peat Marwick. Mr. O'Brien is a Certified Public Accountant and a Certified Management Accountant. 17 MR. GARBIS joined Meridian in May 1996 as Executive Director, Organization Development and was promoted to Vice President in April 1998. Prior to joining Meridian, Mr. Garbis was Director of Human Resources at Lamb Associates, a high-tech engineering consulting firm, from 1993 to 1996. Prior to this, he was Director of Human Resources at Solarex Corp., a division of Amoco/Enron, from 1981 to 1993. Other experience in the field of human resources and organizational management has been with such major companies as Lockheed Martin, ITT Telecommunications, and Nuclear-Chicago, a division of G.D. Searle. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the over-the-counter market and is quoted in the NASDAQ National Market System under the symbol MTEC. The following table shows the high and low sales price of the Company's common stock for each fiscal quarter during the two year period ended July 31, 2000, as reported on the NASDAQ National Market System.
2000 1999 ---- ---- Quarter High Low High Low - ------- ---- --- ---- --- First $ 6.750 $4.375 $11.625 $6.500 Second 7.000 4.250 8.000 4.625 Third 9.625 4.625 7.000 4.000 Fourth 13.000 5.750 7.125 5.000
The Board of Directors has not declared any dividends on the Company's common stock since its organization. As of October 1, 2000, there were approximately 1,200 holders of the Company's common stock known to the Company. 18 ITEM 6. SELECTED FINANCIAL DATA The Company was formed in November 1996 through the merger (the "Merger") of Survival Technology, Inc. ("STI") and Brunswick Biomedical Corporation ("Brunswick"). STI was a publicly traded company that primarily sold auto-injectors to commercial and military markets. Brunswick was primarily a privately held research and development company with core technologies focused on enhancing the diagnosis of cardiac ischemia and arrhythmias, and was engaged principally in the development of the PRIME ECG(TM) electrocardiac mapping system. At the time of the Merger, Brunswick held approximately 61% of STI's outstanding common stock, which Brunswick purchased from the estate of STI's late founder on April 15, 1996. As a result, STI had been treated for financial accounting purposes as a consolidated, majority-owned subsidiary of Brunswick from that date. Upon completion of the Merger, STI was the surviving corporation as a legal matter but the Merger was recorded as a purchase of STI by Brunswick for financial accounting purposes. Through April 15, 1996, only Brunswick's revenues and other financial data are included in the amounts reflected in the following table. STI revenues and other financial data are included from April 15, 1996, the date when Brunswick acquired a majority interest in STI.
Year End Year End Year End Year End Month End Year End July 31, July 31, July 31, July 31, July 31, June 30, (in thousands, except per share data) 2000 1999 1998 1997 1996 1996 - ---------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net sales $54,607 $40,730 $44,668 $40,665 $4,511 $10,375 Gross profit 22,016 12,710 17,577 15,044 1,901 3,420 Operating income (loss) 7,349 1,287 3,067 (1,699) 908 (6,212) Other expense, net (3,536) (3,027) (2,629) (2,395) (140) (539) Income (loss) before income tax, minority interest, and extraordinary loss 3,813 (1,740) 438 (4,094) 768 (6,751) Provision for income tax 1,514 - 343 45 440 27 Minority interest in consolidated subsidiary - - - 266 327 17 Income (loss) before extraordinary loss 2,299 (1,740) 95 (4,405) 1 (6,795) Extraordinary loss on debt refinancing - - (494) - - - ------------------------------------------------------------------------- Net income (loss) $ 2,299 $(1,740) $ (399) $(4,405) $ 1 $(6,795) Basic income(loss) per share $ 0.77 $ (0.58) $ (0.13) $ (2.16) $ 0.02 $(99.32) Diluted income(loss) per share $ 0.70 $ (0.58) $ (0.12) $ (2.16) $ 0.02 $(99.32) Weighted average shares: Basic 2,996 2,993 2,971 2,040 68 68 Diluted 3,276 2,993 3,328 2,040 68 68 EBITDA (1) $10,913 $ 5,103 $ 6,861 $ 1,615 $1,191 $(5,397) EBITDA margin 20.0% 12.5% 15.4% 4.0% 26.4% (52.0)% FINANCIAL POSITION: Current assets $18,809 $20,233 $18,296 $16,031 $ 16,557 $16,352 Working capital 7,586 4,373 6,046 844 4,230 4,145 Fixed assets, net 15,795 15,826 16,389 15,778 14,984 14,990 Total assets 44,685 47,751 46,847 44,082 41,568 41,694 Long-term debt 16,823 17,639 18,850 13,921 16,385 16,056 Shareholders' equity 14,091 11,738 13,338 12,293 3,844 4,387
(1) EBITDA represents operating income plus other income and depreciation and amortization. EBITDA is not a measure of performance or financial condition under generally accepted accounting principles, but is presented to provide additional information related to operating results. EBITDA 19 should not be considered in isolation or as a substitute for other measures of financial performance or liquidity under generally accepted accounting principles. While EBITDA is frequently used as a measure of operations and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues and operating income by segment for the years ended July 31 are as follows:
2000 1999 1998 ---- ---- ---- Revenues: Pharmaceutical systems $53,106 $38,890 $43,579 Cardiopulmonary systems 1,501 1,840 1,089 ------- ------- ------- Total revenues $54,607 $40,730 $44,668 ======= ======= ======= Operating income (loss): Pharmaceutical systems $10,064 $ 2,125 $ 4,183 Cardiopulmonary systems (2,715) (838) (1,116) -------- -------- -------- Total operating income $ 7,349 $ 1,287 $ 3,067 ======== ======== ========
2000 COMPARED WITH 1999 MMT's net income after taxes for the year ended July 31, 2000 was $2,299,000, or $0.70 per share, on revenues of $54.6 million compared to a fiscal 1999 net loss of $1,740,000, or ($0.58) per share, on revenues of $40.7 million, reflecting a 34% increase in revenues. Gross margins increased to 40% in 2000 compared to 31% in 1999, when revenues and margins were negatively impacted by supplying free units of EpiPen as a result of the 1998 EpiPen recall. Operating expenses increased by 28.4% from 1999 to 2000, but decreased overall as a percentage of net sales. This reflects the cost reduction efforts in place in 1999 versus the investment in research and development, and a marketing infrastructure in 2000. Operating income and EBITDA were $7.3 and $10.9 million, respectively, in 2000, up from $1.3 and $5.1 million in 1999 due to improved operations and the absence of recall obligations. Commercial Systems sales were $27.0 million in 2000, 88% higher than 1999 resulting from increasing demand for the EpiPen and the absence of recall obligations. Government Systems sales were $26.1 million, 6.5% higher than 1999 as sales to foreign governments increased. Cardiopulmonary Systems sales were $1.5 million in 2000, 18% lower than 1999 reflecting lower telemedicine sales. Gross margins were 40% of sales in 2000 compared to 31% in 1999. The increased gross margins from 1999 to 2000 resulted primarily from higher production volume to support increased customer orders, and the recall obligations in 1999. The Company shipped 771,000 free EpiPens in fiscal 1999, both for actual units returned and to reimburse the distributor for cash costs. While the direct cost of these free units was fully reserved, the lost revenue from those units depressed gross margins in that year. Sales of the EpiPen in 2000 exceeded pre-recall levels, and management believes the current gross margin is a more accurate reflection of the core business performance. Operating costs were $14.7 million in 2000, an increase of $3.2 million from 1999. The Company initiated cost reduction programs in 1999 to compensate for the lower margins, while in 2000, it was able to invest in the Company's growth. Research and development and selling, general and administrative expenses both increased as product development efforts increased and a marketing infrastructure was enhanced to support corporate long-term goals. 20 Non-operating expenses in 2000 were $3.5 million, 17% higher than in 1999. The higher level in 2000 is a result of decreased grant income from Northern Ireland. The income tax provision was $1.5 million in 2000 and $0 in 1999, reflecting a 40% effective rate for the current year. The current tax rate is a result of the Company's utilization of net operating loss carryforwards, offset by permanent book to tax differences as a result of the amortization of intangibles. The Company continues to have operating loss carryforwards as explained in Note 7 to the financial statements. Line of Business Discussion The Pharmaceutical Systems segment consists of Commercial Systems and Government Systems. Commercial Systems operations include sales of Meridian's highly recognized EpiPen product, used in the emergency treatment of allergic reactions to insect stings or bites, foods, drugs and other allergens, as well as idiopathic or exercise induced anaphylaxis. Within the Pharmaceutical Systems segment, Commercial Systems sales were $27.0 million in 2000, 88% higher than in 1999 due to increased revenue from the EpiPen product. The level of demand of EpiPen has surpassed any previous period, and is expected to continue its growth. In 1999, free units of EpiPen were supplied to satisfy obligations from the May 8, 1998 product recall as discussed above. It is estimated that the delivery of EpiPen units to reimburse recall cash costs depressed 1999 revenues by $3.2 million. Within Government Systems, the Company has a long-standing relationship with the U.S. Department of Defense (DoD), and also markets its products to foreign governments and state and local governments for domestic preparedness. A New Drug Application (NDA) for Meridian's new multi-chambered (MA) auto-injector has been submitted to the FDA on behalf of the U.S. Army with approval anticipated in fiscal 2001. The MA features a dual chamber that allows the automatic injection of two drugs in succession through the same needle. The FDA recently concluded a successful Pre-Approval audit for the MA in the Company's St. Louis facility, and production is anticipated to begin in fiscal 2001 subject to receipt of FDA approval. A contract has recently been signed with a major European nation to develop a version of the MA that will contain other chemical defense antidotes. Government Systems revenues increased by 6.5% in 2000 over the prior year to $26.1 million. The increase resulted from higher sales to foreign governments, reflecting an expanding international market for the Company's products. The Company maintains a core business relationship with the DoD through its industrial base maintenance contract, which was successfully renegotiated in 1999. The DoD exercised the second year option of the contract in fiscal 2000. The contract calls for the retention by the Company of key personnel and facilities to assure expertise for manufacturing auto-injectors containing nerve agent antidotes, the management of the U.S. Army's Shelf Life Extension Program, the pre-stocking of critical components to enhance readiness and mobilization capability, and new product orders. This contract is expected to generate at least $15 million in revenues in fiscal 2001. For purposes of complying with terms of a contract, the Company discloses that for the year ended July 31, 2000, sales of diazapam auto-injectors to customers other than the U.S. DoD totaled 2,035 units. Cardiopulmonary Systems consists of the telemedicine line of business, as well as the Company's PRIME ECG advanced electrocardiac mapping system. The PRIME ECG system, which includes propriety software, offers the potential to significantly improve the non-invasive diagnosis and treatment of heart disease. U.S. clinical trials are scheduled to be completed by the end of calendar 2000. Subject to a successful completion of the clinical trials, a 510(k) application will be made to the FDA for approval to market the product in the U.S. The Company has signed agreements for PRIME ECG distribution in Australia, Austria, Denmark, Switzerland, Poland, Hungary, Spain, Portugal, and Italy and is actively negotiating agreements with several companies to market the product throughout the remainder of Europe. The Company will market the product directly in the United Kingdom. Initial shipment of the 21 product occurred during fiscal 2000 and additional orders have been received for which shipments began during the first quarter of fiscal 2001. Cardiopulmonary Systems product revenues in 2000 were $1.5 million, a decrease from 1999 sales of $1.8 million. The decrease was due to a fluctuation in telemedicine orders. Significant activities in the Cardiopulmonary business continued to focus on moving the PRIME ECG system from the development phase towards market introduction. A CE Mark was received in 1999, approving the product for sale in Europe, and a distribution network in Europe and Australia has been developed and continues to be expanded. US clinical trials began in November 1999 and, subject to the successful completion, an application for FDA approval is expected to be filed in 2001. 1999 COMPARED WITH 1998 MMT's net loss after taxes for fiscal 1999 was $1,740,000 ($0.58 per share) on revenues of $40.7 million compared to a fiscal 1998 net loss of $399,000 ($0.13 per share) on revenues of $44.7 million. Included in the net loss for 1999 was a fourth quarter charge of $454,000 for the EpiPen recall, and included in the net loss for 1998 were charges of $2.7 million for the EpiPen recall and $494,000 for the extraordinary loss on debt extinguishment. Gross margins decreased to 31% in 1999 compared to 39% in 1998. This decrease reflects the impact of supplying free units of EpiPen as a result of the 1998 EpiPen recall. Operating expenses decreased by 6.8% from 1998 to 1999, excluding the recall charges from 1999 and 1998. This reduction reflects planned cost reductions in selling, general and administrative expenses. Operating income and EBITDA were $1.3 and $5.1 million, respectively, in 1999, down from $3.1 and $6.9 million in 1998 due to the gross margin decline associated with the recall. The Company has estimated results excluding the impact of the 1998 EpiPen recall and the 1997 EpiEZPen voluntary exchange program for the years ended July 31, 1999 and 1998 as follows:
(In thousands) Impact of the 1998 Epipen recall and the 1997 EpiEZPen voluntary Reported results exchange program Estimated results ---------------- ---------------- ----------------- The year ended July 31, 1999 Net sales $ 40,730 $ 3,187 $ 43,917 Operating income 1,287 2,842 4,129 (Loss) income before income taxes (1,740) 2,842 1,102 The year ended July 31, 1998 Net sales $ 44,668 1,294 $ 45,962 Operating income 3,067 3,713 6,780 Income before income taxes and extraordinary loss 438 3,713 4,151
The table above removes the estimated impact of the 1998 EpiPen recall and the 1997 EpiEZPen voluntary exchange program from actual reported results. The impact includes lost sales and gross margins due to free units supplied to reimburse for cash costs, as well as the actual expense provided. The above analysis does not quantify the impact that the free units supplied for replacement purposes had on sales and gross margins. Commercial business sales were $14.4 million in 1999, 36% lower than 1998 resulting from free units of EpiPen supplied to satisfy replacement units and cash costs relating to the EpiPen recall. Government business sales were $24.5 million, 16% higher than 1998 as sales to the U.S. Department of Defense (DoD) and civilian defense customers grew. Cardiopulmonary sales were $1.8 million in 1999, 69% higher than 1998 reflecting increased telemedicine sales, primarily the CardioBeeper product. 22 Gross margins were 31% of sales in 1999 compared to 39% in 1998. The decreased gross margins from 1998 to 1999 resulted primarily from recall obligations. Operating costs were $11.4 million in 1999, a decrease of $3.1 million from 1998. Most of the decreased cost was from reserve provisions for the EpiPen recall totaling $2.7 million which was expensed in 1998. Additionally, administrative costs were lower by 10% due to cost reduction programs. Non-operating expenses in 1999 were $3.0 million, 15% higher than in 1998. The higher costs in 1999 resulted from increased interest cost on debt. Interest cost includes a full year of the Senior Subordinated Debt compared to only 3 months in 1998, following the April 30, 1998 refinancing. Additionally, borrowings on the Revolving Line of Credit were higher in 1999 due to working capital requirements relating to production for recall obligations. The Company generated other income items amounting to $340,000 in 1999 and $256,000 in 1998, mostly from grant income in 1999 and sales of nonstrategic technology in 1998. The income tax provision was $0 in 1999 and $26,000 in 1998 for Alternative Minimum Tax. The Company continues to have significant operating loss carryforwards as explained in Note 7 to the financial statements. Line of Business Discussion Commercial sales were $14.4 million in 1999, 36% lower than in 1998 due to free units of EpiPen supplied to satisfy obligations from the May 8, 1998 product recall. R&D services and contract filling both had an increase in revenues from 1998 to 1999, including the initial shipment to Mylan Laboratories of Acyclovir, contributing modestly toward this business unit's results. Government revenues increased by 16% in 1999 over the prior year to $24.5 million. The increase resulted from higher sales to the DoD under the IBMC contract, as well as sales to local municipalities for civil defense - domestic preparedness applications. Sales to foreign governments were 58% higher in 1999 than 1998 reflecting a favorable timing of orders and an expanding international market for the Company's products. Cardiopulmonary product revenues in 1999 were $1.8 million, an increase from 1998 sales of $1.1 million. The increase was due to higher telemedicine sales, specifically the CardioBeeper and CardioPocket products. The Company capitalized $1,043,000 in 1999 for software development costs relating to PRIME. Extraordinary Loss The Company refinanced its term debt on April 30, 1998 and took a $494,000 after-tax charge to write-off unamortized debt discount associated with warrants issued in conjunction with the original debt. LIQUIDITY AND CAPITAL RESOURCES The Company provided $8.5 million of cash from operations in 2000. Positive cash flows from operations consisted primarily of net income, non-cash expenses for depreciation and amortization, and a decrease in accounts receivable, which were partially offset by an increase in inventories. Investing activities used $1.8 million of cash in fiscal 2000 primarily for capital additions. Financing activities used $6.9 million primarily for the paydown of debt. Working capital at July 31, 2000 was $7.6 million, up from $4.4 million at July 31, 1999. The increase is primarily attributable to the paydown of the Company's lines of credit. At July 31, 2000, accounts receivable were $7.2 million, representing 54 days-sales-outstanding, and inventories were $8.1 million reflecting a turn-over rate of 4.4 times per year. Borrowings under the working capital lines were $1.7 million, leaving $7.0 million available credit at July 31, 2000. The maximum available under the 23 Company's asset based line of credit will revert to $6.5 million on October 31, 2000, down from the $8.5 million maximum, to which it was increased in fiscal 1999. OUTLOOK The Company anticipates that the two core business units within Pharmaceutical Systems will have strong years in fiscal 2001 which will result in double digit percentage earnings per share growth for the year as a whole, and increased EBITDA over fiscal year 2000. Commercial Systems plans to build upon last year's impressive growth. Percentage revenue growth in this business unit is not expected to approach the rate of increase of fiscal year 2000, but the Company anticipates an increase in demand for its core products of approximately ten percent. The Government Systems group is expecting to continue to maintain its strong and stable core U.S. DoD business, while experiencing increasing demand for its products in foreign markets. Additionally, further inroads into the Domestic Preparedness market are expected. The Cardiopulmonary Systems business unit is expected to contribute additional revenue growth to the Company in fiscal year 2001. PRIME ECG sales in Europe and Australia are expected to begin to accelerate during the year, as the business unit's primary focus continues its shift to sales and marketing of this new technology. Clinical trials in the United States and the United Kingdom are expected to be completed during the second quarter. This will be followed by a 510(k) filing with the FDA. The Company anticipates that initial sales of PRIME ECG will occur in the United States during the fourth quarter of fiscal year 2001, subject to gaining FDA approval. The Company expects to generate increased EBITDA during fiscal year 2001. The Company will invest substantial amounts in developing the market for PRIME ECG and will increase its expenditures in research and development focused on further applications for its auto injector technology. Additionally, the Company expects to reduce its debt during the year through cash generated by operations and/or a placement of equity securities. INFLATION In the view of management, the low levels of inflation in recent years and changing prices have had no significant effect on the Company's financial condition and results of operations. Generally, the Company is able to mitigate the effects of inflation on operating costs and expenses through price increases and productivity gains. 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's earnings are affected by fluctuations in the value of the U.S. dollar, as compared to foreign currencies, as a result of transactions in foreign markets. At July 31, 2000, the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company's transactions are denominated would have resulted in an increase in net income of approximately $169,000 for the year ended July 31, 2000. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which are a changed dollar value of the resulting sales, changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors' services become more or less attractive. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices. While the Company is exposed to changes in interest rates as a result of its outstanding debt, the Company does not currently utilize any derivative financial instruments related to its interest rate exposure. Total short-term and long-term debt outstanding at July 31, 2000 was $19.6 million, consisting of $5.2 million in variable rate borrowing and $14.4 million in fixed rate borrowing. At this level of variable rate borrowing, a hypothetical 10% increase in interest rates would have decreased pre-tax earnings by approximately $49,000 for the year ended July 31, 2000. At July 31, 2000, the fair value of the Company's fixed rate debt outstanding was estimated at $15.0 million. A hypothetical 10% change in interest rates would not result in a material change in the fair value of the Company's fixed rate debt. 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
MERIDIAN MEDICAL TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) July 31, 2000 1999 -------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 79 $ 227 Restricted cash 285 278 Receivables, less allowances of $524 and $467, respectively 7,229 9,557 Inventories 8,061 6,889 Deferred income taxes 1,937 1,965 Prepaid income taxes - 546 Other current assets 1,218 771 ---------- ---------- Total current assets 18,809 20,233 ---------- ---------- Property, plant and equipment 23,261 21,407 Less - Accumulated depreciation 7,466 5,581 ---------- ---------- Net property, plant and equipment 15,795 15,826 ---------- ---------- Deferred financing fees 691 749 Capitalized software costs 1,429 1,588 Excess of cost over net assets acquired, net 6,340 7,403 Other intangible assets, net 1,621 1,952 ---------- ---------- Total assets $ 44,685 $ 47,751 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and other accrued liabilities $ 8,062 $ 7,080 Note payable to bank 1,743 7,317 Customer deposits 392 54 Current portion of long-term debt 1,026 1,409 ---------- ---------- Total current liabilities 11,223 15,860 ---------- ---------- Long-term debt - notes payable, net of discount 16,823 17,582 Long-term debt - other - 57 Deferred income taxes 1,765 1,793 Other non-current liabilities 783 721 Commitments and contingencies (Note 9) - - ---------- ---------- Total liabilities 30,594 36,013 ---------- ---------- Shareholders' equity: Common stock (voting and non-voting)- Par value $.10 per share; 18,000,000 shares authorized; 3,001,962 and 2,994,930 shares issued 300 299 Additional capital 32,345 32,187 Accumulated other comprehensive income --cumulative translation adjustment (154) (14) Accumulated deficit (18,152) (20,451) Unearned stock option compensation (35) (70) Treasury stock, 30,176 shares at cost (213) (213) ----------- ----------- Total shareholders' equity 14,091 11,738 ---------- ---------- Total liabilities and shareholders' equity $ 44,685 $ 47,751 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 26 MERIDIAN MEDICAL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Year Ended July 31, 2000 1999 1998 ---- ---- ---- Net sales $ 54,607 $ 40,730 $ 44,668 Cost of sales 32,591 28,020 27,091 ------------- ------------- ------------ Gross profit 22,016 12,710 17,577 Selling, general, and administrative expenses 8,174 6,245 6,928 Research and development expenses 2,853 1,248 1,300 Depreciation and amortization 3,640 3,476 3,538 Product exchange/recall expense - 454 2,744 ------------- ------------- ------------ 14,667 11,423 14,510 ------------- ------------- ------------ Operating income 7,349 1,287 3,067 Other (expense) income: Interest expense (3,301) (3,367) (2,885) Other (expense) income (235) 340 256 -------------- ------------- ------------ (3,536) (3,027) (2,629) -------------- -------------- ------------ Income (loss) before income taxes and extraordinary loss 3,813 (1,740) 438 Provision for income taxes 1,514 - 343 ------------- ------------- ------------ Income (loss) before extraordinary loss 2,299 (1,740) 95 Extraordinary loss on debt extinguishment (net of an income tax benefit of $317) - - (494) ------------- ------------- ------------ Net income (loss) $ 2,299 $ (1,740) $ (399) ============= ============= ============ Earnings per common share: Income (loss) before extraordinary item $ 0.77 $ (0.58) $ 0.03 Extraordinary loss - - (0.16) ------------- ------------- ------------ Net income (loss) per common share $ 0.77 $ (0.58) $ (0.13) ============= ============= ============ Earnings per common share assuming dilution: Income (loss) before extraordinary item $ 0.70 $ (0.58) $ 0.03 Extraordinary loss - - (0.15) ------------- ------------- ------------ Net income (loss) per common share assuming dilution $ 0.70 $ (0.58) $ (0.12) ============= ============= ============= Weighted average shares: Basic 2,996 2,993 2,971 Diluted 3,276 2,993 3,328
The accompanying notes are an integral part of these consolidated financial statements. 27 MERIDIAN MEDICAL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended July 31, 2000 1999 1998 ---- ---- ---- OPERATING ACTIVITIES: Net income (loss) $ 2,299 $ (1,740) $ (399) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 3,640 3,476 3,538 Amortization of unearned stock compensation 35 35 35 Amortization of capitalized software costs 159 - - Amortization of notes payable discount and deferred financing fees 369 246 876 Non-cash charge to modify warrant terms - 75 166 Deferred income taxes - (280) 28 Extraordinary loss on debt extinguishment - - 811 Changes in assets and liabilities Receivables 2,328 (2,912) 720 Inventories (1,172) 1,723 (2,565) Other current assets 99 (636) (150) Accounts payable and other accrued liabilities 958 (261) (1,299) Other (184) 149 (101) ------------- ------------- -------------- Net cash provided by (used for) operating activities 8,531 (125) 1,660 INVESTING ACTIVITIES Purchase of fixed assets (1,747) (1,493) (2,668) Increase in restricted cash (7) (7) (7) Capitalized software costs - (1,043) (545) ------------ -------------- -------------- Net cash used for investing activities (1,754) (2,543) (3,220) FINANCING ACTIVITIES Net (payment) proceeds from line of credit (5,574) 3,329 (125) Payment on long-term debt (1,440) (717) (12,447) Proceeds on long-term debt - - 14,070 Proceeds from issuance of warrants - - 930 Payment of financing fees (70) (30) (868) Proceeds from issuance of common stock 159 29 261 ------------ ------------- ------------- Net cash (used for) provided by financing activities (6,925) 2,611 1,821 ------------- ------------- ------------- Net (decrease) increase in cash (148) (57) 261 Cash and cash equivalents at beginning of period 227 284 23 ------------ ------------- ------------- Cash and cash equivalents at end of period $ 79 $ 227 $ 284 ============ ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 28 MERIDIAN MEDICAL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
Unearned Cumulative Stock Common Additional Accumulated Translation Treasury Option Shareholders' Stock Capital Deficit Adjustment Stock Compensation Equity ------------------------------------------------------------------------------ Balance at July 31, 1997 $ 292 $ 30,733 $(18,312) $ (67) $ (213) $ (140) $12,293 Warrants issued with notes payable - 930 - - - - 930 Modification of warrant terms - 166 - - - - 166 Issuance of common stock from the exercise of stock options and warrants 7 254 - - - - 261 Amortization of stock option compensation - - - - - 35 35 Foreign currency translation - - - 52 - - 52 Net loss - - (399) - - - (399) ------------ Total comprehensive loss (347) ------------------------------------------------------------------------------ Balance at July 31, 1998 299 32,083 (18,711) (15) (213) (105) 13,338 Issuance of common stock from the exercise of stock options and warrants - 29 - - - - 29 Modification of warrant terms - 75 - - - - 75 Amortization of stock option compensation - - - - - 35 35 Foreign currency translation - - - 1 - - 1 Net loss - - (1,740) - - - (1,740) ------------ Total comprehensive loss (1,739) ------------------------------------------------------------------------------ Balance at July 31, 1999 299 32,187 (20,451) (14) (213) (70) 11,738 Issuance of common stock from the exercise of stock options and warrants 1 158 - - - - 159 Amortization of stock option compensation - - - - - 35 35 Foreign currency translation - - - (140) - - (140) Net income - - 2,299 - - - 2,299 ------------ Total comprehensive income 2,159 ------------------------------------------------------------------------------ Balance at July 31, 2000 $ 300 $ 32,345 $(18,152) $ (154) $ (213) $ (35) $14,091 ==============================================================================
The accompanying notes are an integral part of these consolidated financial statements. 29 ITEM 8. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MERIDIAN MEDICAL TECHNOLOGIES, INC. 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Meridian Medical Technologies, Inc. ("Company") is a technology-based health care company that designs, develops and produces a broad range of automatic injectors, prefilled syringes, cardiopulmonary diagnostic and monitoring products, and other innovative health care devices. The Company also supplies customized drug delivery system design, pharmaceutical research and development and FDA current Good Manufacturing Practice (cGMP)-approved sterile product manufacturing to pharmaceutical and biotechnology companies. PRINCIPLES OF CONSOLIDATION All intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH The Company considers all investments with a maturity of three months or less on their acquisition date to be cash equivalents. Restricted cash consists of cash pledged as collateral on an outstanding letter of credit supporting the working capital line of credit at the Company's Belfast subsidiary. INVENTORIES Inventories relating to commercial and military products are stated at the lower of cost (first-in, first-out) or market. FIXED ASSETS Fixed assets are stated at cost. The Company computes depreciation and amortization under straight-line and accelerated methods using the following estimated useful lives: Furniture and equipment 2 to 15 years Capital leases and leasehold improvements 4 to 31.5 years
The Company uses either the units of production method or the straight-line method over a 10-year life (whichever period is shorter) to depreciate production molds and tooling over their estimated production life cycle. 30 INTANGIBLE ASSETS Intangible assets consist of the following (in thousands):
July 31, 2000 1999 ---- ---- Excess of cost over net assets acquired $ 10,351 $ 10,351 Patents and licenses 2,418 2,418 Other 1,805 1,805 --------------- --------------- 14,574 14,574 Less: accumulated amortization (6,613) (5,219) --------------- --------------- $ 7,961 $ 9,355 =============== ===============
Excess of cost over net assets acquired and other intangible assets are amortized over 10 years. Legal costs incurred in connection with patent applications and costs of acquiring patents and licenses are capitalized and amortized on a straight-line basis over the shorter of the patent life (not to exceed seventeen years) or the period of expected benefit. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets to determine whether an event or change in circumstances indicates that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, the Company bases its evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, the Company determines whether an impairment has occurred through the use of an undiscounted cash flows analysis of assets at the lowest level for which identifiable cash flows exist. If impairment has occurred, the Company recognizes a loss for the difference between the carrying amount and the estimated value of the asset. The fair value of the asset is measured using discounted cash flow analysis or other valuations techniques. No impairment expense was recognized for the years ended July 31, 2000, 1999 and 1998. REVENUE RECOGNITION Sales of medical products are recorded when shipments are made to customers. Shipping terms are FOB shipping point. Revenues from the U.S. Department of Defense ("DoD") industrial base maintenance contract are recorded ratably throughout the contract term, with the exception of revenue from product sales, which are recorded upon acceptance by the customer, and revenue from the component prestocking program. Under the component prestocking program, the customer purchases raw material inventory from the Company. Upon receipt and inspection of raw materials from suppliers, title passes to the customer, at which point the Company invoices the customer and records revenue. Revenues from license fees are recorded when the fees are due and non-refundable. Revenues from research and development arrangements are recognized in the period related work has been substantially completed. FOREIGN CURRENCY Assets and liabilities of foreign operations are translated at the exchange rate in effect at the balance sheet date. Revenue and expense accounts are translated using a weighted average of exchange rates in effect during the year. Cumulative translation adjustments are shown in the accompanying consolidated balance sheets as a separate component of shareholders' equity. The aggregate exchange gain (loss) included in determining net income was $40,000, ($62,000), and ($12,000) for the years ended July 31, 2000, 1999, and 1998, respectively. 31 RESEARCH AND DEVELOPMENT Research and development expenses are charged to operations in the period incurred. Customer funded R&D projects generated $1.5 million and $1.8 million of revenues for the years ended July 31, 2000 and 1999, respectively. Costs associated with these projects are reported as costs of goods sold in the same period that revenue is recognized. INCOME TAXES The Company accounts for income taxes using the asset and liability method that requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences between carrying amounts and the tax basis of assets and liabilities. A valuation allowance reduces deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. VALUE OF FINANCIAL INSTRUMENTS Other than described below, the Company considers the recorded value of its financial assets and liabilities, which consist primarily of cash, accounts receivable, accounts payable and other accrued liabilities to approximate the fair value of the respective assets and liabilities at July 31, 2000 and 1999. Management believes the principal balance of its long-term debt, which is $927,000 and $1.2 million higher than the carrying value at July 31, 2000 and 1999, respectively, is a better estimate of the fair value of that liability. The debt is carried net of unamortized discount. USE OF ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and assumptions. NET INCOME (LOSS) PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands):
Year Ended July 31, 2000 1999 1998 ---- ---- ---- NUMERATOR: Income (loss) before extraordinary loss $ 2,299 $(1,740) $ 95 Extraordinary loss on debt extinguishment (net of an income tax benefit of $317) - - (494) ------- -------- -------- Net income (loss) $ 2,299 $(1,740) $ (399) ======= ======== ======== DENOMINATOR: Denominator for basic earnings per share - weighted average shares outstanding 2,996 2,993 2,971 Dilutive effect of stock options and warrants 280 - 357 ------- -------- -------- Denominator for diluted earnings per share 3,276 2,993 3,328 ======= ======== ========
32 RECLASSIFICATION Certain reclassifications have been made to prior year financial statements in order to conform with the current year presentation. 2. INVENTORIES Inventories as of July 31, 2000 and 1999 consist of the following (in thousands):
2000 1999 ---- ---- Components and subassemblies $ 4,673 $ 3,667 Work in process 3,250 3,325 Finished goods 884 335 ------------ ------------ 8,807 7,327 Less: inventory valuation allowance (746) (438) ------------ ------------ $ 8,061 $ 6,889 ============ ============
3. FIXED ASSETS Fixed assets as of July 31, 2000 and 1999 consist of the following (in thousands):
2000 1999 ---- ---- Furniture and equipment $ 15,957 $ 14,889 Leasehold improvements 4,852 4,862 Construction in progress 2,452 1,656 ------------ ------------ 23,261 21,407 Less: accumulated depreciation (7,466) (5,581) ------------ ------------ $ 15,795 $ 15,826 ============ ============
The Company capitalized interest costs of $0 and $51,000 on internally constructed fixed assets for the years ended July 31, 2000 and 1999, respectively. Depreciation expense was $2.2, $2.1 and $2.2 million for the years ended July 31, 2000, 1999 and 1998, respectively. 4. CAPITALIZED SOFTWARE COSTS During fiscal 1999 and 1998, the Company capitalized $1,043,000 and $545,000, respectively, of software development costs related to a product under development, the PRIME ECG Electrocardiac Mapping System. No further costs were capitalized on this project during fiscal 2000. The Company accounts for these development costs in accordance with SFAS 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." The Company began amortizing the capitalized costs during the third quarter of fiscal 2000, the time the product was available for general release to customers. The capitalized costs are amortized on a product by product basis based on the greater of the ratio of current sales to estimated total sales or a straight-line basis over the remaining estimated economic life of the product, not exceeding five years. The Company periodically evaluates the capitalized software costs for recoverability against anticipated future revenues, and writes down or writes off a portion of the capitalized costs if recoverability is in question. 33 5. DEBT SENIOR SUBORDINATED NOTES In April 1998, the Company entered into a note agreement with Nomura Holding America, Inc. for $15 million of senior subordinated notes, at a 12% fixed rate of interest, due April 2005. The Company issued a warrant to Nomura to purchase 204,770 shares of the Company's common stock in conjunction with the transaction. $930,000 of the proceeds was allocated to the value of the warrant; accordingly, the note is carried net of the related unamortized discount. The Company is amortizing the discount over the term of the debt. This resulted in charges against operations of $132,800 in fiscal 2000 and 1999, and $33,000 in fiscal 1998. Subsequent to this transaction, the Company modified the terms of the warrant issued to Nomura, lowering the per share exercise price from $11.988 to $4.625. The Company recorded additional interest expense of $75,000 and $166,000 in fiscal 1999 and 1998, respectively, relating to the modification of terms. Proceeds from the transaction were used for the following (in thousands): Paydown of ING term note (see below) $ 3,500 Payoff of Sarnoff note 6,004 Payoff of EM Industries subordinated loan 1,277 Paydown of ING Line of Credit 3,351 Financing fees (deferred) 868 --------- $ 15,000 =========
Among other things, the Company is required to maintain certain financial covenants and is restricted from paying cash dividends. LINES OF CREDIT The Company has an agreement with International Nederlanden (U.S.) Capital Corporation ("ING") for an $8.5 million line of credit and a $5 million long-term loan. The ING line of credit accrues interest at either the greater of the prime rate plus 1.25% (10.75% at July 31, 2000) or the federal funds rate plus 1.75%; or the eurodollar loan rate plus 3.25%. The ING line is secured by certain accounts receivable and inventory. The outstanding borrowing on the Company's ING line of credit was $1.7 million and $7.2 million at July 31, 2000 and 1999, respectively. The Company pays a commitment fee to ING of .5% on the average unused portion of the line of credit. The interest rate on outstanding borrowings was 10.75% at July 31, 2000 and 9.25% at July 31, 1999. An additional line of credit exists for the Company's operation in N. Ireland. The line of credit is for (pound)145,000 and is secured by an irrevocable standby Letter of Credit. The line of credit matures annually each December and bears interest on outstanding borrowings at the bank's published rate of 8.00% at July 31, 2000. The outstanding borrowing on this line of credit was $93,000 and $168,000 at July 31, 2000 and 1999, respectively. LONG-TERM DEBT (ING) The term loan with ING accrues interest at either the Eurodollar loan rate plus 3.5%; or the greater of the prime rate plus 1.5% (11.0% at July 31, 2000) or the federal funds rate plus 2.00%. The loan is repayable in quarterly principal payments of $250,000 until March 2002, at which point payments increase to $500,000 per quarter. The loan matures on March 31, 2003. As noted above, a portion of the proceeds of the Nomura note were used to pay down this term debt in April 1998. The outstanding balance was $3,750,000 and $4,750,000 at July 31, 2000 and 1999, respectively. 34 Warrants were issued to ING in the financing described above. The Company allocated $2,072,900 of the note proceeds to the warrants based on the relative fair value of the warrants and the note at the agreement date. Accordingly, the note is carried at a discount from its maturity value. $811,000 of the remaining unamortized discount ($494,000 after the tax benefit of $317,000) was written off as an extraordinary loss on extinguishment of debt in April 1998. The Company is amortizing the remaining discount over the term of the debt. This resulted in charges against operations of $108,000 in fiscal 2000 and 1999, and $181,000 in fiscal 1998. Among other things, the Company is required to maintain certain financial covenants and is restricted from paying cash dividends. OTHER LONG-TERM DEBT In May 1995, the Company entered into a loan agreement with the CIT Group/Equipment Financing, Inc. ("CIT") to assist in financing the Company's capital investment programs. This arrangement consists of a series of loans for the acquisition of production molds, high-speed component preparation and filling equipment and facility renovations. Loan principal outstanding was $26,000 and $294,000 as of July 31, 2000 and 1999, respectively. The interest rate in both years was approximately 8.8%. Repayment of each loan is due in sixty (60) equal monthly installments. The agreement with CIT is collateralized by the asset financed with the loan. In January 1996, the Company received a non-interest bearing loan in the amount of $375,000 from Dey Laboratories (Dey), STI's exclusive distributor for the EpiPen(R). The proceeds from this loan assisted the Company in purchasing high-speed filling and automated packaging equipment. Repayment of this loan commenced during the first quarter of fiscal 1997 with an agreed upon credit per unit of product shipments to Dey. The balance at July 31, 1999 was $172,000 and the loan was repaid in full during the year ended July 31, 2000. Maturities of all long term-debt are as follows (in thousands): 2001 $ 1,026 2002 1,250 2003 1,500 2004 - 2005 15,000 Thereafter - ------------- Subtotal 18,776 Discounts on term loans (927) ------------- Total debt per balance sheet $ 17,849 =============
Interest paid for the years ended July 31, 2000, 1999 and 1998 was $2,958,000, $2,882,000 and $2,314,000, respectively. 6. SHAREHOLDERS' EQUITY STOCK OPTIONS The Company has adopted two Stock Option Plans ("the Plans") which reserve 500,000 shares for granting of options through 2001 and 500,000 shares, subject to shareholder approval, for granting of options through 2007. The Plans provide for issuance of non-qualified stock options, incentive stock options, stock appreciation rights, incentive shares and restricted stock. The Company also has assumed stock options granted by predecessor companies. Options granted to employees, officers and directors pursuant the Company's stock option plans generally have been exercisable in varying amounts in cumulative annual installments up to ten years 35 from the date of grant. The exercise price on all options granted during years ended July 31, 2000 and 1999 was equivalent to the market value of the Company's stock on the date of grant. The Company recognized $35,000 of expense in each of fiscal 2000, 1999, and 1998 as a result of options issued in prior years with exercise prices less than fair market value at the date of grant. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," recommends a fair value based methodology of accounting for all stock option plans. Under SFAS No. 123, companies may account for stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations and provide pro forma disclosure of net income, as if the fair value based method of accounting defined in SFAS No. 123 had been applied. The Company has elected to follow APB 25 and related Interpretations in accounting for its employee stock options and provide pro forma fair value disclosure under SFAS 123. For SFAS 123, the fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2000, 1999 and 1998. Risk-free interest rate of 5.0%, 6.5%, and 4.2%, respectively; no dividends; a volatility factor of the expected market price of the Company's common stock of .55, .49, and .53, respectively, and a weighted-average expected life of the options of approximately 4-10 years. The weighted average fair value of options granted during 2000, 1999 and 1998 was $4.36, $4.89, and $3.93, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For the purpose of pro forma disclosures, the estimated fair value of the stock options is amortized to expense over the options' vesting periods. The Company's pro forma net income (loss) and net income (loss) per share calculated using the provisions of FAS 123 were as follows (in thousands except per share data):
Year Ended July 31, 2000 1999 1998 ---- ---- ---- Net income (loss) $ 2,299 $ (1,740) $ (399) Pro forma FAS 123 expense (394) (284) (155) --------------- ---------------- ---------------- Pro forma net income (loss) $ 1,905 $ (2,024) $ (554) =============== ================ ================ Weighted average shares outstanding 2,996 2,993 2,971 Pro forma net income (loss) per share $ 0.64 $ (0.68) $ (0.19)
36 The following table summarizes stock option activity and stock options exercisable for the years ended July 31, 2000, 1999 and 1998.
2000 Weighted Average 1999 Weighted Average 1998 Weighted Average ---- Exercise Price ---- Exercise Price ---- Exercise Price ---------------- ---------------- ---------------- Number of shares Options outstanding at beginning of year 795,435 $ 6.81 645,100 $ 6.83 553,300 $ 6.15 Granted during the year 281,326 6.20 203,685 7.07 163,200 8.62 Exercised during the year (7,032) 9.13 (4,067) 7.49 (40,200) 6.98 Expired or terminated (59,895) 8.02 (49,283) 8.11 (31,200) 6.04 ------------- -------- ----------- -------- ----------- --------- Options outstanding at end of year 1,009,834 $ 6.54 795,435 $ 6.81 645,100 $ 6.83 ============ ======== =========== ======== =========== ========= Options exercisable at end of year 519,334 $ 6.18 473,800 $ 6.04 383,200 $ 6.13 ============ ======== =========== ======== =========== =========
The price range of options outstanding are as follows:
2000 1999 1998 ---- ---- ---- Less than $1.00 148,512 148,512 148,512 $1.00 to $5.00 66,950 56,950 61,950 $5.00 to $9.00 586,059 353,960 196,075 $9.00 + 208,313 236,013 238,563 -------------------- -------------------- -------------------- 1,009,834 795,435 645,100 ==================== ==================== ====================
The average contractual life of the Company's options is approximately 6-10 years. COMMON STOCK WARRANTS Outstanding warrants to acquire the Company's common stock as of July 31, 2000 and 1999 are as follows:
2000 1999 ---- ---- Exercise price: Less than $1.00 83,579 83,579 $1.00 -$10.99 381,968 397,302 @$11.00 512,645 513,271 -------------------- -------------------- 978,192 994,152 ==================== ====================
598,931 of the warrants expire during calendar year 2001, 204,770 expire in 2005, and 174,491 expire in 2006. 37 7. INCOME TAXES The provision for federal, state, and foreign income taxes exclusive of taxes related to the extraordinary loss consist of the following (in thousands):
Year Ended July 31, 2000 1999 1998 ---- ---- ---- Current: Federal $ 2,357 $ (230) $ 554 State 447 (50) 122 Foreign 185 - - NOL utilization (1,475) - (358) ----------- ----------- ----------- 1,514 (280) 318 Deferred: Federal and state - 280 25 Other - - - ----------- ----------- ----------- - 280 25 ----------- ----------- ----------- $ 1,514 $ - $ 343 =========== =========== ===========
The following is a reconciliation of the provision for income taxes from continuing operations to the provision calculated at the statutory rate (in thousands):
Year Ended July 31, 2000 1999 1998 ---- ---- ---- Provision for income taxes at federal statutory rate $ 1,296 $ (592) $ 149 State taxes, net of federal income tax benefit 261 (122) 20 Non-deductible costs 483 474 512 Changes in valuation allowance (920) 172 (358) Foreign taxes 321 - - Other 73 68 20 ----------- ----------- ----------- $ 1,514 $ - $ 343 =========== =========== ===========
The Company paid income taxes of $126,400, $761,700, and $508,000 for the years ended July 31, 2000, 1999, and 1998, respectively. 38 The Company provides deferred income taxes for temporary differences between the book basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities for tax return purposes. Deferred tax assets and liabilities were as follows at July 31, 2000 and 1999 (in thousands):
July 31, 2000 1999 ---- ---- Foreign net operating loss carryforwards $ 1,456 $ 1,003 U.S. net operating loss and tax credits carryforward 787 2,391 Inventory valuation 244 113 Uniform inventory capitalization 421 530 Postretirement benefits 305 281 Vacation expense 163 136 Restructuring charge 31 51 Product exchange reserve - 139 Other 522 233 Valuation allowance (1,992) (2,912) ------------ ------------- Deferred tax asset $ 1,937 $ 1,965 ============ ============ Depreciation $ (1,648) $ (1,666) Patent costs (117) (127) Other - - ------------ ------------- Deferred tax liability $ (1,765) $ (1,793) ============= =============
At July 31, 2000, the Company has net operating losses (NOLs) available for future use to offset U.S. income of approximately $2.0 million. These NOLs begin to expire in 2005. At July 31, 2000, MMT Ltd., a U.K. subsidiary, has NOLs to offset its future U.K. income of approximately $4.9 million, which have no expiration date. Realization of net deferred tax assets at the balance sheet date is dependent upon future earnings. Based on hisortical net operating losses and uncertain future earnings, a valuation allowance to offset a substantial portion of net deferred tax assets has been recorded at July 31, 2000 and 1999. For financial statement reporting purposes, income before income taxes includes the following components:
Year Ended July 31, 2000 1999 1998 ---- ---- ---- U.S. $ 5,321 $ (1,116) $ 1,319 Foreign (1,508) (624) (881) ---------- ------------ ----------- $ 3,813 $ (1,740) $ 438 ========== ============ ==========
8. EMPLOYEE RETIREMENT PLANS PENSION AND SAVINGS PLANS The Company maintains a profit sharing thrift plan covering all full-time employees. Annual contributions under the plan may be made up to 6.6% of the base annual salary of all plan participants not covered by a collective bargaining agreement. Plan benefit allocations are based on the participants' annual compensation. The Company made no contributions in fiscal 2000, 1999, or 1998. As part of this profit sharing thrift plan, eligible employees may elect to contribute up to 12% of their base salary to the plan. The Company matches a portion of the contributions by employees not covered by a collective 39 bargaining agreement. The Company match amounted to $156,700, $153,600, and $151,300 in fiscal years 2000, 1999, and 1998, respectively. The Company also made payments to a pension plan for its full-time employees in St. Louis, Missouri covered by a collective bargaining agreement. Contributions to this plan resulted in expense of $125,600, $103,400, and $101,700 in fiscal years 2000, 1999, and 1998, respectively. OTHER POSTRETIREMENT BENEFITS The Company sponsors a postretirement benefit plan (the "Plan") to provide certain medical and life insurance benefits to retirees, their spouses and dependents. The Plan is contributory for medical benefits based on the retiree's years of service and is noncontributory for life insurance benefits. The Company funds its obligations under the Plan as incurred. The following table sets forth the Plan's funded status (in thousands):
2000 1999 ---- ---- Benefit obligation at the beginning of the year $ 991 $ 945 Service cost 20 34 Interest cost 54 71 Actuarial (gain)/loss (319) (13) Benefits paid (36) (46) ------------- ------------- Benefit obligation at the end of the year 710 991 Unrecognized prior service cost (24) (33) Unrecognized net gain 680 391 Unrecognized transition obligation (583) (628) ------------- ------------- Accrued benefit costs $ 783 $ 721 ============ ============
The Company recognized net periodic postretirement expense of $98,100, $111,000 and $91,000 for the years ended July 31, 2000, 1999 and 1998, respectively, as follows (in thousands):
2000 1999 1998 ---- ---- ---- Service cost-benefits attributed to service during periods $ 20 $ 34 $ 29 Interest cost on accumulated postretirement benefit obligation 54 71 67 Amortization of prior service 9 9 9 Amortization of net gain (30) (48) (59) Amortization of transition obligation 45 45 45 ------------ ------------ ------------ Net periodic postretirement benefit cost $ 98 $ 111 $ 91 ============ ============ ============
For measurement purposes, an 7.5% annual rate of increase in cost of health care was assumed for fiscal 2000; the rate was assumed to decrease gradually to 5% by 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing assumed health care cost by 1% in each year would increase the accumulated postretirement benefit obligation as of July 31, 2000 by $109,000 and the aggregate of the service and interest cost component of net periodic postretirement benefit cost by $15,000 for the year ended July 31, 2000. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% for 2000 and 1999. 40 9. COMMITMENTS AND CONTINGENCIES LEASES The Company has various commitments under operating leases through 2014 relating to computer hardware and software, its pharmaceutical manufacturing facility and warehouses in St. Louis, Missouri, its facility in the United Kingdom, a facility in Belfast, Northern Ireland, and administrative offices in Columbia, Maryland and St. Louis, Missouri. Future minimum rentals as of July 31, 2000 under noncancellable leases are as follows (in thousands):
Operating Sublease Year Ending July 31, Leases Revenue -------------------- ------ ------- 2001 $ 1,434 $ 374 2002 982 207 2003 606 29 2004 552 2 2005 475 - Thereafter 3,190 - ------------ ------------ $ 7,239 $ 612 ============ ============
The Company incurred net rental expense of $1,282,500, $1,066,200 and $986,200 in 2000, 1999 and 1998, respectively. SALE/LEASEBACK OF FORMER HEADQUARTERS BUILDING In connection with the December 1988 sale of the Company's former headquarters building in Bethesda, Maryland, the Company's obligations under the Leasehold Deed of Trust ("Ground Lease") were assigned to and assumed by the purchaser of the building. The Company remains contingently liable under the Ground Lease. The annual commitment under the Ground Lease aggregated $160,000 in 2000 (adjusted for increases in the Consumer Price Index) and extends until the year 2042. LITIGATION Lawsuits and claims are filed from time to time against the Company and its subsidiaries in the ordinary course of business. Management of the Company, after reviewing developments to date with legal counsel, is of the opinion that the outcome of such matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. GOVERNMENT CONTRACT REVENUE The Company's supply contracts with the Department of Defense ("DoD") are subject to post-award audit and potential price redetermination. In the opinion of management, adjustments, if any, on completed contracts would not have a material adverse effect on the Company's consolidated financial position or results of operations. 41 EMPLOYEE CONTRACTS The Company has an agreement with a key employee which provides for certain benefits should the employee be terminated within the term of the agreement for other than specified reasons. The Company also has agreements with certain key employees which provide for certain benefits should the employees be terminated within a two year period subsequent to a change of control (as defined by the agreements) for other than specified reasons. Benefits to be provided under these agreements include continued life, disability, accident and health insurance coverage for a period of two years and a severance payment up to 100-200% of the employee's annual base compensation. Additionally, all stock options held by the employee become immediately exercisable and any restrictions on transfer of the Company's stock held by the employee shall lapse. These arrangements renew for three-year periods unless timely notice of non-renewal is given. The maximum contingent liability under these agreements at July 31, 2000 is $1,598,000. 10. SEGMENT INFORMATION The Company operates in two industry segments: pharmaceutical systems and cardiopulmonary systems. Both segments include the design, development, manufacture and sale of medical products and related services, with a major focus on safe and convenient participation by the patient. The cardiopulmonary business unit operates in N. Ireland with most of its revenue generated overseas. Revenues, operating income, and long-lived asset additions by segment for the years ended July 31, and total assets at July 31 are as follows:
2000 1999 1998 ---- ---- ---- Revenues: Pharmaceutical systems $ 53,106 $ 38,890 $ 43,579 Cardiopulmonary systems 1,501 1,840 1,089 -------------- -------------- -------------- Total revenues 54,607 40,730 44,668 Operating income (loss): Pharmaceutical systems $ 10,064 $ 2,125 $ 4,183 Cardiopulmonary systems (2,715) (838) (1,116) --------------- --------------- --------------- Total operating income 7,349 1,287 3,067 Long-lived asset additions Pharmaceutical systems $ 1,747 $ 840 $ 2,668 Cardiopulmonary systems - 1,696 545 -------------- -------------- -------------- Total long-lived asset additions 1,747 2,536 3,213 Total assets Pharmaceutical systems $ 40,018 $ 42,667 $ 43,934 Cardiopulmonary systems 4,667 5,084 2,913 -------------- -------------- -------------- Total assets 44,685 47,751 46,847
42 11. SIGNIFICANT CUSTOMERS & FOREIGN OPERATIONS Financial information relating to major customers and export sales follows (in thousands):
2000 1999 1998 ---- ---- ---- Sales to major U.S. customers: U.S. Department of Defense $ 17,904 $ 20,698 $ 16,939 Dey L.P. 23,918 11,449 20,734 Other 3,459 4,270 1,730 -------------- -------------- -------------- Total 45,281 36,417 39,403 Export sales: Contract sales to the Governments of foreign countries 7,825 2,474 1,565 Other 1,501 1,839 3,700 -------------- -------------- -------------- Total export sales 9,326 4,313 5,265 -------------- -------------- -------------- Total net sales $ 54,607 $ 40,730 $ 44,668 ============== ============== ==============
The Company extends credit to domestic customers and generally requires a letter of credit for export sales. At July 31, 2000 and 1999, the Company had 62% and 56%, respectively, of its accounts receivable from two customers, Dey and the U.S. government. Dey's parent is a shareholder of the Company. The Company operates subsidiaries in the U.K which represent 5.9% and 8.5% of the Company's sales for the years ended July 31, 2000 and 1999, respectively, and 6.3% and 8.1% of the Company's total assets at July 31, 2000 and 1999, respectively. Long-lived assets located in the U.K. were 12.3% and 11.3% of the Company's total long-lived assets at July 31, 2000 and 1999, respectively. 12. PRODUCT EXCHANGE/RECALL On May 8, 1998, the Company announced a voluntary Class I recall of 47 lots of its EpiPen and EpiPen Jr. auto-injectors (approximately 1,000,000 units) because some may not have provided effective doses of medication. The cost of the recall was $3.2 million and was included in 1998 and 1999 results. The Company had $1.6 million, $3.2 million and $1.3 million of EpiPen shipments during fiscal 2000, 1999 and 1998, respectively, to satisfy cash costs incurred by the distributor for the 1998 EpiPen recall and the 1997 EpiEZPen voluntary exchange program. 43 13. QUARTERLY OPERATING RESULTS (UNAUDITED) (in thousands, except per share data)
Quarter Ended -------------------------------------------------------------- Fiscal Year 2000 Oct. 31, 1999 Jan. 31, 2000 Apr. 30, 2000 Jul. 31, 2000 - ---------------- ------------- ------------- ------------- ------------- Net sales $ 11,755 $ 12,066 $ 14,068 $ 16,718 Cost of sales 7,067 7,296 8,607 9,621 ---------- ---------- ---------- ---------- Gross profit 4,688 4,770 5,461 7,097 Operating expenses 3,206 3,609 3,548 4,304 ---------- ---------- ---------- ---------- Operating income 1,482 1,161 1,913 2,793 Other expense, net (901) (822) (906) (907) ---------- ---------- ---------- ---------- Income before income tax 581 339 1,007 1,886 Provision for income tax 227 132 316 839 ---------- ---------- ---------- ---------- Net income $ 354 $ 207 $ 691 $ 1,047 ========== ========== ========== ========== Basic net income per share $ 0.12 $ 0.07 $ 0.23 $ 0.35 ========== ========== ========== ========== Diluted net income per share $ 0.11 $ 0.06 $ 0.21 $ 0.31 ========== ========== ========== ========== Fiscal Year 1999 Oct. 31, 1998 Jan. 31, 1999 Apr. 30, 1999 Jul. 31, 1999 - ---------------- ------------- ------------- ------------- ------------- Net sales $ 10,850 $ 9,824 $ 9,620 $ 10,436 Cost of sales 6,673 7,422 7,937 5,988 ---------- ---------- ---------- ---------- Gross profit 4,177 2,402 1,683 4,448 Operating expenses 2,980 2,816 2,309 3,318 ---------- ---------- ---------- ---------- Operating income (loss) 1,197 (414) (626) 1,130 Other expense, net (838) (453) (705) (1,031) ---------- ---------- ---------- ---------- Income (loss) before income tax 359 (867) (1,331) 99 Provision for income tax 93 (93) - - ---------- ---------- ---------- ---------- Net income (loss) $ 266 $ (774) $ (1,331) $ 99 ========== ========== ========== ========== Basic net income (loss) per share $ 0.09 $ (0.26) $ (0.44) $ 0.03 ========== =========== =========== ========== Diluted net income (loss) per share $ 0.08 $ (0.26) $ (0.44) $ 0.03 ========== ========== ========== ==========
During the quarter ended July 31, 1999, the Company recorded a charge of $454,000 for the estimated additional cost of a recall of the Company's EpiPen product. Gross Margins for the quarters ended January 31, 1999 and April 30, 1999 were both negatively impacted by the shipment of free units to satisfy recall obligations. In addition, the gross margin for the quarter ended January 31, 1999 was affected by product mix, and that of the quarter ended April 30, 1999 was affected by a planned upgrade and renovation of the Company's clean room manufacturing facility, which caused a temporary closure of the plant. 44 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Meridian Medical Technologies, Inc. We have audited the accompanying consolidated balance sheets of Meridian Medical Technologies, Inc. and subsidiaries as of July 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended July 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Meridian Medical Technologies, Inc. and subsidiaries at July 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP McLean, VA September 8, 2000 45 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEMS 10. THROUGH 13. Information required by Part III (Items 10 through 13) of this form 10-K is incorporated by reference to the Company's definitive Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended July 31, 2000, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year to which this report relates. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS FORM 8-K (a) The following documents are included under Item 8 in this report: 1. Financial Statements: Consolidated Balance Sheets at July 31, 2000 and 1999 Consolidated Statements of Operations for the years ended July 31, 2000, 1999, and 1998. Consolidated Statements of Shareholders' Equity for the years ended July 31, 2000, 1999, and 1998. Consolidated Statements of Cash Flows for the years ended July 31, 2000, 1999, and 1998. Notes to Consolidated Financial Statements Report of Independent Auditors The above-listed financial statements are included in Item 8 to this Form 10-K. 2. Financial Statement Schedule: The following financial statement schedule immediately precedes the signatures to this report: Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are immaterial, not applicable or the required information is shown in the consolidated financial statements or the notes thereto. 46 3. Exhibits:
Exhibit No. Description of Exhibit - ----------- ---------------------- (3.1) The Company's Bylaws (As Amended). Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1997. (3.2) First Amended and Restated Certificate of Incorporation and certification of the amendment of first amended and restated Certificate of Incorporation. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1997. (4.1) Form of warrant issued by the Registrant to former holders of Brunswick preferred stock. Incorporated by reference herein from Exhibit 4.1 to Form 8-K filed by the Registrant dated December 5, 1996. (4.2) Forms of warrants assumed and issued by the Registrant in connection with the merger with Brunswick. Incorporated by reference herein from Exhibit 4.1 to Form 8-K filed by the Registrant dated December 5, 1996. (4.3) Form of warrant issued to the Estate of Stanley J. Sarnoff, assumed by the Registrant. Incorporated by reference herein from Exhibit 4b to Schedule 13D filed by Brunswick dated April 15, 1996. (10.1) Indenture of Lease, dated January 1, 1982, between Survival Technology, Inc. and Abraham M. Morrison, Incorporated by reference to Exhibit (10.1) to the Company's Annual Report on Form 10-K for the year ended July 31, 1988 (File No. 0-5958). (10.5) Survival Technology, Inc. 1986 Stock Option Plan (As Amended). Incorporated by reference to Exhibit (4.2) to Registration Statement No. 33-46981 on Form S-8.* (10.7.1) Letter Agreement dated as of January 31, 1990 between Center Laboratories, a division of EM Industries, Inc. and the Company. Incorporated by reference to Exhibit (10.10.1) to the Company's Annual Report on Form 10-K for the year ended July 31, 1990. (10.8) Agreement dated June 23, 1981 between Survival Technology, Inc, and American Home Products Corporation. Incorporated by reference to Exhibit (10.12) to the Company's Annual Report on Form 10-K for the year ended July 31, 1988 (File No. 0-5958). (10.8.1) License Agreement dated April 20, 1982 between Survival Technology, Inc. and American Home Products Corporation. Incorporated by reference to Exhibit (10.12.1) to the Company's Annual Report on Form 10-K for the year ended July 31, 1988 (File No. 0-5958). (10.10) Development, Manufacturing and Supply Agreement between Mylan Laboratories, Inc. and Survival Technology, Inc. dated August 31, 1993. Incorporated by reference to Exhibit (10.11) to the Company's Annual Report on Form 10-K for the year ended July 31, 1993 (File No. 0-5958). (10.10.1) Development, Manufacturing and Supply Amendment Agreement dated July 28, 1994 between Mylan Laboratories, Inc. and Survival Technology, Inc. Incorporated by reference to Exhibit (10.12.1) to the Company's Annual Report on Form 10-K for the year ended July 31, 1994. 47 (10.11) Lease Agreement dated August 26, 1991 between Pru Beta 2 and the Company. Incorporated by reference to Exhibit (10.12) the Company's Annual Report on Form 10-K for the year ended July 31, 1991 (File No. 0-5958). (10.15) Credit Agreement, dated as of April 15, 1996, among Brunswick, as the Borrower, Various Lenders and Internationale Nederlanden (U.S.) Capital Corporation as the Agent for the Lenders (incorporated by reference herein Exhibit 1 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.16) Warrant Purchase Agreement, dated as of April 15, 1996, between Brunswick and Internationale Nederlanden (U.S.) Capital Corporation (incorporated by reference herein from Exhibit 2 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996) (10.17) Registration Rights Agreement, dated as of April 15, 1996, between Brunswick and Internationale Nederlanden (U.S.) Capital Corporation (incorporation by reference herein from Exhibit 3 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.18) First Amendment to Credit Agreement, dated as October 25, 1996, between Brunswick and Internationale Nederlanden (U.S.) Capital Corporation (incorporation by reference herein from Exhibit 4 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.18.1) Second Amendment to Credit Agreement, date September 2, 1997 between Meridian Medical Technologies, Inc. and Internationale Nederlanden (U.S.) Capital Corporation. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1997 (File No. 0-5958). (10.19) First Amendment to warrant Purchase Agreement, dated as of October 25, 1996, between Brunswick and Internationale Nederlanden (U.S.) Capital Corporation (incorporated by reference herein from Exhibit 5 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.20) Assumption Agreement to the Credit Agreement, dated as of November 20, 1996, between Meridian Medical Technologies, Inc. and Internationale Nederlanden (U.S.) Capital Corporation (incorporated by reference herein from Exhibit 6 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.21) Assumption Agreement to the Warrant Purchase Agreement, dated as of November 20, 1996, between Meridian Medical Technologies, Inc. and Internationale Nederlanden (U.S.) Capital Corporation (incorporated by reference herein from Exhibit 7 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). 48 (10.22) $10,000,000 Term Note of Meridian Medical Technologies, Inc. dated November 20, 1996 (incorporated by reference herein from Exhibit 9 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.23) $15,000,000 Revolving Note of Meridian Medical Technologies, Inc. dated November 20, 1996 (incorporated by reference herein from Exhibit 10 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.24) Warrant Certificate for 90,912 Warrants of Meridian Medical Technologies, Inc. Certificate No. 1 (incorporated by reference herein from Exhibit 10 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.25) Warrant Certificate for 83,579 Warrants of Meridian Medical Technologies, Inc. - Certificate No. 1 (incorporated by reference herein from Exhibit 11 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.26) Employment agreement with James H. Miller, dated November 20, 1996. Incorporated by reference to the Company's Form 10K for the year ended July 31, 1996 (File No. 0-5958). * (10.27) Form of Registration Rights Agreement with former Brunswick stockholders (Incorporated by reference to the Company's Form 10K for the year ended July 31, 1996. (File No. 0-5958). (10.28) Note and Warrant Purchase Agreement dated as of April 30, 1998. Incorporated by reference to the Company's Form 10-Q for the quarter ended April 30, 1998. (10.29) Registration Rights Agreement dated as of April 30, 1998. Incorporated by reference to the Company's Form 10-Q for the quarter ended April 30, 1998. (10.30) Warrant Agreement dated as of April 30, 1998. Incorporated by reference to the Company's Form 10-Q for the quarter ended April 30, 1998. (10.31) First Amendment to the Note and Warrant Purchase Agreement dated October 15, 1998. Incorporated by reference to the Company's Form 10-K for the year ended July 31, 1998. (10.32) Fifth Amendment to the Credit Agreement dated October 15, 1998. Incorporated by reference to the Company's Form 10-K for the year ended July 31, 1998. (10.33) Contract SP0200-99-D-0007 dated July 30, 1999 between the U.S. Government (Defense Personnel Support Center) and the Company. Incorporated by reference to the Company's Form 10-K for the year ended July 31, 1999. (10.34) Form of Change of Control Agreement between the Company and Dr. Gerald L. Wannarka and Mr. Peter A. Garbis dated October 26, 1998, and between the Company and Mr. Dennis P. O'Brien dated March 8, 1999. Incorporated by reference to the Company's Form 10-K for the year ended July 31, 1999. * (10.35) Sixth Amendment to the Credit Agreement dated November 6, 1998 between the Company and Internationale Nederlanden (U.S.) Capital Corporation. Incorporated by reference to the Company's Form 10-K for the year ended July 31, 1999. 49 (10.36) Waiver and Amendment Agreement dated June 14, 1999 between the Company and Nomura Holding America Inc. Incorporated by reference to the Company's Form 10-K for the year ended July 31, 1999. (10.37) Agreement by and between Survival Technology, Inc. and EM Industries, Inc., dated as of October 21, 1996. Incorporated by reference to the Company's Form 10-Q for the quarter ended October 31, 1999. (10.38) Waiver and Amendment Agreement dated October 29, 1999 between the Company and Nomura Holding America Inc. Incorporated by reference to the Company's Form 10-Q for the quarter ended October 31, 1999. (10.39) Seventh Amendment to the Credit Agreement dated October 29, 1999 between the Company and ING (U.S.) Capital Corporation. Incorporated by reference to the Company's Form 10-Q for the quarter ended October 31, 1999. (10.40) Form of Change of Control Agreement between the Company and Mr. Robert J. Kilgore dated April 1, 2000. Filed herewith. * (22) A list of the Company's subsidiaries is not provided because they, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of the end of the year covered by this report. (23.1) Consent of Independent Auditors. Filed herewith. (24.0) Power of Attorney of the Company's Directors. Filed herewith. (27.0) Financial Data Schedule dated July 31, 2000. Filed herewith.
*Management contract, compensatory plan or arrangement. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended July 31, 2000. 50 SCHEDULE II MERIDIAN MEDICAL TECHNOLOGIES, INC. VALUATION AND QUALIFYING ACCOUNTS
Additions Additions Balance at Charged to Charged to Beginning of other Costs and Write-off Balance at Period Accounts Expenses Deductions End of Period FOR THE YEAR ENDED JULY 31, 2000 Allowance for doubtful accounts $ 466,500 $ - $ 57,200 $ - $ 523,700 Inventory reserves $ 438,000 $ - $ 663,600 $ 356,100 $ 745,500 Restructuring reserves $ 134,300 $ - $ - $ 55,600 $ 78,700 =========== ========== =========== =========== =========== FOR THE YEAR ENDED JULY 31, 1999 Allowance for doubtful accounts $ 324,800 $ - $ 141,700 $ - $ 466,500 Inventory reserves $ 458,900 $ - $ 45,800 $ 66,700 $ 438,000 Restructuring reserves $ 121,800 $ - $ 80,000 $ 67,500 $ 134,300 =========== ========== =========== =========== =========== FOR THE YEAR ENDED JULY 31, 1998 Allowance for doubtful accounts $ 247,800 $ - $ 77,000 $ - $ 324,800 Inventory reserves $ 546,300 $ - $ 92,600 $ 180,000 $ 458,900 Restructuring reserves $ 123,800 $ - $ - $ 2,000 $ 121,800 =========== ========== =========== =========== ===========
51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 MEDICAL TECHNOLOGIES, INC. - ----------------------------------- (Registrant) By /S/JAMES H. MILLER ------------------ James H. Miller Chairman of the Board President & CEO Dated: October 25, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /S/ JAMES H. MILLER Chairman of the Board October 25, 2000 - ----------------------------- President and Director James H. Miller (Principal Executive Officer) /S/ DENNIS P. O'BRIEN Vice President of Finance October 25, 2000 - ----------------------------- (Principal Financial and Dennis P. O'Brien Accounting Officer) * Director October 25, 2000 - ----------------------------- Bruce M. Dresner * Director October 25, 2000 - ----------------------------- Robert G. Foster * Director October 25, 2000 - ----------------------------- David L. Lougee * Director October 25, 2000 - ----------------------------- E. Andrews Grinstead, III * - By: /S/ JAMES H. MILLER October 25, 2000 - ----------------------------- James H. Miller Attorney-in-fact
52 EXHIBIT INDEX
Exhibit No. Description of Exhibit - ----------- ---------------------- (3.1) The Company's Bylaws (As Amended). Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1997. (3.2) First Amended and Restated Certificate of Incorporation and certification of the amendment of first amended and restated Certificate of Incorporation. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1997. (4.1) Form of warrant issued by the Registrant to former holders of Brunswick preferred stock. Incorporated by reference herein from Exhibit 4.1 to Form 8-K filed by the Registrant dated December 5, 1996. (4.2) Forms of warrants assumed and issued by the Registrant in connection with the merger with Brunswick. Incorporated by reference herein from Exhibit 4.1 to Form 8-K filed by the Registrant dated December 5, 1996. (4.3) Form of warrant issued to the Estate of Stanley J. Sarnoff, assumed by the Registrant. Incorporated by reference herein from Exhibit 4b to Schedule 13D filed by Brunswick dated April 15, 1996. (10.1) Indenture of Lease, dated January 1, 1982, between Survival Technology, Inc. and Abraham M. Morrison, Incorporated by reference to Exhibit (10.1) to the Company's Annual Report on Form 10-K for the year ended July 31, 1988 (File No. 0-5958). (10.5) Survival Technology, Inc. 1986 Stock Option Plan (As Amended). Incorporated by reference to Exhibit (4.2) to Registration Statement No. 33-46981 on Form S-8.* (10.7.1) Letter Agreement dated as of January 31, 1990 between Center Laboratories, a division of EM Industries, Inc. and the Company. Incorporated by reference to Exhibit (10.10.1) to the Company's Annual Report on Form 10-K for the year ended July 31, 1990. (10.8) Agreement dated June 23, 1981 between Survival Technology, Inc, and American Home Products Corporation. Incorporated by reference to Exhibit (10.12) to the Company's Annual Report on Form 10-K for the year ended July 31, 1988 (File No. 0-5958). (10.8.1) License Agreement dated April 20, 1982 between Survival Technology, Inc. and American Home Products Corporation. Incorporated by reference to Exhibit (10.12.1) to the Company's Annual Report on Form 10-K for the year ended July 31, 1988 (File No. 0-5958). (10.10) Development, Manufacturing and Supply Agreement between Mylan Laboratories, Inc. and Survival Technology, Inc. dated August 31, 1993. Incorporated by reference to Exhibit (10.11) to the Company's Annual Report on Form 10-K for the year ended July 31, 1993 (File No. 0-5958). (10.10.1) Development, Manufacturing and Supply Amendment Agreement dated July 28, 1994 between Mylan Laboratories, Inc. and Survival Technology, Inc. Incorporated by reference to Exhibit (10.12.1) to the Company's Annual Report on Form 10-K for the year ended July 31, 1994. 53 (10.11) Lease Agreement dated August 26, 1991 between Pru Beta 2 and the Company. Incorporated by reference to Exhibit (10.12) the Company's Annual Report on Form 10-K for the year ended July 31, 1991 (File No. 0-5958). (10.15) Credit Agreement, dated as of April 15, 1996, among Brunswick, as the Borrower, Various Lenders and Internationale Nederlanden (U.S.) Capital Corporation as the Agent for the Lenders (incorporated by reference herein Exhibit 1 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.16) Warrant Purchase Agreement, dated as of April 15, 1996, between Brunswick and Internationale Nederlanden (U.S.) Capital Corporation (incorporated by reference herein from Exhibit 2 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996) (10.17) Registration Rights Agreement, dated as of April 15, 1996, between Brunswick and Internationale Nederlanden (U.S.) Capital Corporation (incorporation by reference herein from Exhibit 3 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.18) First Amendment to Credit Agreement, dated as October 25, 1996, between Brunswick and Internationale Nederlanden (U.S.) Capital Corporation (incorporation by reference herein from Exhibit 4 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.18.1) Second Amendment to Credit Agreement, date September 2, 1997 between Meridian Medical Technologies, Inc. and Internationale Nederlanden (U.S.) Capital Corporation. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1997 (File No. 0-5958). (10.19) First Amendment to warrant Purchase Agreement, dated as of October 25, 1996, between Brunswick and Internationale Nederlanden (U.S.) Capital Corporation (incorporated by reference herein from Exhibit 5 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.20) Assumption Agreement to the Credit Agreement, dated as of November 20, 1996, between Meridian Medical Technologies, Inc. and Internationale Nederlanden (U.S.) Capital Corporation (incorporated by reference herein from Exhibit 6 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.21) Assumption Agreement to the Warrant Purchase Agreement, dated as of November 20, 1996, between Meridian Medical Technologies, Inc. and Internationale Nederlanden (U.S.) Capital Corporation (incorporated by reference herein from Exhibit 7 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). 54 (10.22) $10,000,000 Term Note of Meridian Medical Technologies, Inc. dated November 20, 1996 (incorporated by reference herein from Exhibit 9 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.23) $15,000,000 Revolving Note of Meridian Medical Technologies, Inc. dated November 20, 1996 (incorporated by reference herein from Exhibit 10 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.24) Warrant Certificate for 90,912 Warrants of Meridian Medical Technologies, Inc. Certificate No. 1 (incorporated by reference herein from Exhibit 10 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.25) Warrant Certificate for 83,579 Warrants of Meridian Medical Technologies, Inc. - Certificate No. 1 (incorporated by reference herein from Exhibit 11 to Schedule 13D filed by ING (U.S.) Investment Corporation dated December 2, 1996). (10.26) Employment agreement with James H. Miller, dated November 20, 1996. Incorporated by reference to the Company's Form 10K for the year ended July 31, 1996 (File No. 0-5958). * (10.27) Form of Registration Rights Agreement with former Brunswick stockholders (Incorporated by reference to the Company's Form 10K for the year ended July 31, 1996. (File No. 0-5958). (10.29) Note and Warrant Purchase Agreement dated as of April 30, 1998. Incorporated by reference to the Company's Form 10-Q for the quarter ended April 30, 1998. (10.29) Registration Rights Agreement dated as of April 30, 1998. Incorporated by reference to the Company's Form 10-Q for the quarter ended April 30, 1998. (10.30) Warrant Agreement dated as of April 30, 1998. Incorporated by reference to the Company's Form 10-Q for the quarter ended April 30, 1998. (10.31) First Amendment to the Note and Warrant Purchase Agreement dated October 15, 1998. Incorporated by reference to the Company's Form 10-K for the year ended July 31, 1998. (10.32) Fifth Amendment to the Credit Agreement dated October 15, 1998. Incorporated by reference to the Company's Form 10-K for the year ended July 31, 1998. (10.33) Contract SP0200-99-D-0007 dated July 30, 1999 between the U.S. Government (Defense Personnel Support Center) and the Company. Incorporated by reference to the Company's Form 10-K for the year ended July 31, 1999. (10.34) Form of Change of Control Agreement between the Company and Dr. Gerald L. Wannarka and Mr. Peter A. Garbis dated October 26, 1998, and between the Company and Mr. Dennis P. O'Brien dated March 8, 1999. Incorporated by reference to the Company's Form 10-K for the year ended July 31, 1999. * (10.35) Sixth Amendment to the Credit Agreement dated November 6, 1998 between the Company and Internationale Nederlanden (U.S.) Capital Corporation. Incorporated by reference to the Company's Form 10-K for the year ended July 31, 1999. 55 (10.36) Waiver and Amendment Agreement dated June 14, 1999 between the Company and Nomura Holding America Inc. Incorporated by reference to the Company's Form 10-K for the year ended July 31, 1999. (10.37) Agreement by and between Survival Technology, Inc. and EM Industries, Inc., dated as of October 21, 1996. Incorporated by reference to the Company's Form 10-Q for the quarter ended October 31, 1999. (10.38) Waiver and Amendment Agreement dated October 29, 1999 between the Company and Nomura Holding America Inc. Incorporated by reference to the Company's Form 10-Q for the quarter ended October 31, 1999. (10.39) Seventh Amendment to the Credit Agreement dated October 29, 1999 between the Company and ING (U.S.) Capital Corporation. Incorporated by reference to the Company's Form 10-Q for the quarter ended October 31, 1999. (10.40) Form of Change of Control Agreement between the Company and Mr. Robert J. Kilgore dated April 1, 2000. Filed herewith. * (22) A list of the Company's subsidiaries is not provided because they, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of the end of the year covered by this report. (23.1) Consent of Independent Auditors. Filed herewith. (24.0) Power of Attorney of the Company's Directors. Filed herewith. (27.0) Financial Data Schedule dated July 31, 2000. Filed herewith.
*Management contract, compensatory plan or arrangement. EX-10.40 2 a2028635zex-10_40.txt EXHIBIT 10.40 Exhibit 10.40 CHANGE OF CONTROL AGREEMENT AGREEMENT made as of this 1st day of April, 2000, between Meridian Medical Technologies, Inc., a Delaware corporation (hereinafter "Company"), and Robert J. Kilgore (hereinafter "Executive"). WHEREAS, the Company wishes to assure the continued availability of the Executive's services and to create an environment which will promote the Executive's giving impartial and objective advice in circumstances resulting from the possibility of a Change of Control (as herein defined) of the Company; and WHEREAS, the Company and the Executive wish to provide the Executive with financial protection in the event significant changes in the Executive's employment status occur following a Change of Control of the Company. NOW, THEREFORE, the Company and the Executive, in consideration of the terms and conditions set forth herein and other valuable consideration, receipt and sufficiency of which are hereby acknowledged, mutually covenant and agree as follows: 1. TERM. The term of this Agreement shall commence on the date hereof and terminate on April 1, 2003 unless the Executive's employment with the Company or a subsidiary is sooner terminated prior to a Change of Control in which case it will terminate upon the termination of the Executive's employment (the "Term"), provided, however, if a Change of Control occurs prior to April 1, 2003, then this Agreement will terminate on the second anniversary of the Change of Control. 2. PAYMENTS UPON CHANGE OF CONTROL AND TERMINATION EVENT. The Company shall make payments to the Executive as provided for in paragraph 4 hereof upon the occurrence of both a Change of Control of the Company and a Termination Event, as such terms are defined in paragraph 3. 3. DEFINITIONS. (a) "Base Salary" shall mean an amount equal to the Executive's highest annual base salary after the date hereof and preceding a Termination Event. (b) "Cause" means (i) the Executive's failure or refusal to perform satisfactorily any duties reasonably required of the Executive by the Company (other than by reason of disability), after reasonable demand for substantial performance is delivered by the Company specifically identifying the manner in which the Company believes the Executive has not performed his duties; (ii) the commission by the Executive of a felony or the perpetration by the Executive of a dishonest act against or breach of fiduciary duty toward the Company or any of its customers, employees, or vendors; or (iii) any willful act or omission by the Executive which is injurious in any material respect to the financial condition or business reputation of the Company. For purposes of this definition, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his act or omission was in the best interests of the Company. (c) A "Change of Control" shall be deemed to have occurred if any of the following have occurred prior to the expiration of the Term: (i) any person or group of persons (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended ("1934 Act")) together with its affiliates, excluding employee benefit plans of the Company, is or becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 promulgated under the 1934 Act) of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; (ii) as a result of a proxy contest, individuals who prior to the conclusion thereof constituted the Board of Directors of the Company (the "Board") (including for this purpose any new director whose election or nomination for election by the Company's shareholders in connection with such proxy contest was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors prior to such proxy contest) cease to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied); (iii) during any period of twenty-four consecutive months, individuals who at the beginning of such period constituted the Board (including for this purpose any new director whose election or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied); (iv) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation or entity regardless of which entity is the survivor, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (v) the stockholders of the Company approve a plan of complete liquidation or winding-up of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets; or - 2 - (vi) any other event which the Board of Directors determines should constitute a Change of Control. (d) A "Termination Event" shall be deemed to have occurred if, within the twenty-four (24) month period following a Change of Control, (1) the Executive's employment with Company is terminated by the Company without Cause, other than by reason of death, disability or retirement; or (2) the Executive voluntarily terminates his employment with the Company within 30 days after the occurrence of any of the following events: (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities immediately prior to the Change of Control, or any other action by the Company which results in a diminution in any material respect in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof, as the same may be increased from time to time; (iii) the Company's requiring the Executive to be based at any office or location that is more than fifty (50) miles from the Executive's office or location immediately prior to the Change of Control; (iv) the failure by the Company (i) to continue in effect any bonus, stock option, or other cash or equity-based incentive plan in which the Executive participates immediately prior to a Change in Control that is material to the Executive's total compensation, unless an arrangement not materially less favorable to the Executive (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or (ii) to continue the Executive's participation in such plan (or in such substitute or alternative plan) on a basis at least as favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change of Control; or (v) the failure by the Company to continue to provide the Executive with benefits that in the aggregate are not materially less favorable to the Executive than those received by the Executive under the Company's pension (including, but not limited to, tax-qualified plans), life insurance, health, accident, disability or other welfare plans in which the Executive was participating, at costs not materially greater than to those paid by the Executive, immediately prior to the Change of Control. - 3 - 1. CASH PAYMENTS. In the event of a Termination Event, the Company agrees to continue to pay to the Executive, the Executive's Base Salary for a period of twelve (12) months. 2. DEATH OF EXECUTIVE. If the Executive dies before receiving all payments payable to him under paragraph 4 of this Agreement, the Company shall continue to make payments pursuant to paragraph 4 hereof to the Executive's spouse, or if the Executive leaves no spouse, to the estate of the Executive. 3. HEALTH AND LIFE INSURANCE BENEFITS. The Company agrees to maintain, for a period of twelve (12) months following the date of the occurrence of a Termination Event, the Executive's eligibility for and participation in any health and life insurance plans ("Insurance Benefits"), in which the Executive was eligible to participate prior to the Termination Event and upon the same basis and cost as prior to the Termination Event, provided however, that if, for any reason, the Company is unable to continue the Executive's participation in any such plan, the Company shall cause the Executive to be eligible to participate in a substantially equivalent arrangement upon substantially the same basis and cost as prior to the Termination Event. Notwithstanding any other provision of this Agreement to the contrary, if in connection with the termination of the Executive's employment for any reason the Company is obligated by law or by contract (including any employment or severance agreement other than this Agreement) or by Company plan or policy to provide the Executive with life or health insurance after the Executive's termination (or a cash payment in lieu thereof), then any Insurance Benefits hereunder shall be reduced by the amount of any payments and similar benefits described above, as applicable. 4. NO DUTY TO SEEK OTHER EMPLOYMENT. Amounts payable to the Executive under this Agreement shall not be reduced by the amount of any compensation received by the Executive from any other employer or source, and the Executive shall not be under any obligation to seek other employment or gainful pursuit as a result of this Agreement. 5. REDUCTION OF PAYMENTS. Notwithstanding any other provision of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change of Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement (all such payments and benefits, including the payments and benefits provided for hereunder, being hereinafter called "Total Payments") would not be deductible (in whole or part), by - 4 - the Company, an affiliate or other person or entity making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended, then, to the extent necessary to make such portion of the Total Payments deductible, (A) the cash payments provided for by paragraph 4 hereof shall first be reduced (if necessary, to zero), and (B) the benefits provided for by paragraph 7 hereof shall next be reduced. For purposes of this limitation, no portion of the Total Payments the receipt or enjoyment of which the Executive shall have waived by written notice to the Company prior to the date of payment shall be taken into account. All determinations required to be made under the provisions of this paragraph 8 hereof shall be made by tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive. 6. PAYMENT OF COMPENSATION TO TERMINATION DATE. In addition to any other payments payable to the Executive hereunder, the Company shall pay the Executive full compensation and all other amounts and benefits to which the Executive is entitled through the termination of his employment. 7. NO RIGHT TO CONTINUED EMPLOYMENT. This Agreement shall not confer upon the Executive any right with respect to continuance of employment by the Company or any subsidiary, nor shall it interfere in any way with the right of his employer to terminate his employment at any time. No payments hereunder shall be required except upon the occurrence of both a Change of Control of the Company and a Termination Event. Thus, except as specifically provided herein, no payments hereunder shall be made on account of termination of the Executive's employment (i) upon the Executive's death, disability or retirement, (ii) by the Company with or without cause or (iii) upon the Executive's voluntary termination. 8. WAIVER OF BREACH. Waiver by any party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver by such party of any subsequent breach hereof. 9. INVALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision, which shall remain in full force and effect. 10. ENTIRE AGREEMENT; WRITTEN MODIFICATION; TERMINATION. This Agreement contains the entire agreement between the parties concerning the matters covered hereby. No modification, amendment or waiver of any provision hereof shall be effective unless in writing specifically referring hereto and signed by the party against whom such provision as modified or amended or such waiver is sought to be - 5 - enforced. This Agreement shall terminate as of the time the Company makes the final payment which it may be obligated to pay hereunder or provide the final benefit which it may be obligated to provide hereunder. This Agreement supersedes and replaces any earlier agreement on the subject matter hereof. 11. COUNTERPARTS. This Agreement may be made and executed in counterparts, each of which may be considered an original for all purposes. 12. GOVERNING LAW. This Agreement is governed by and is to be construed and enforced in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the undersigned parties have executed or caused to be executed this Agreement as of the day and year first above written. MERIDIAN MEDICAL TECHNOLOGIES, INC. By: ------------------------------------ "EXECUTIVE" --------------------------------------- EX-23.1 3 a2028635zex-23_1.txt EXHIBIT 23.1 MERIDIAN MEDICAL TECHNOLOGIES, INC. FORM 10-K JULY 31, 2000 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-18279; Form S-8 Nos. 333-32498, 33-46981, 33-34045, 33-26681 and 2-80908) and in the related prospectuses of Meridian Medical Technologies, Inc. or its predecessor, Survival Technology, Inc. of our report dated September 8, 2000, with respect to the consolidated financial statements and schedule of Meridian Medical Technologies, Inc. included in this Annual Report (Form 10-K) for the year ended July 31, 2000. /s/ Ernst & Young LLP McLean, VA October 24, 2000 EX-24 4 a2028635zex-24.txt EXHIBIT 24 MERIDIAN MEDICAL TECHNOLOGIES, INC. FORM 10-K JULY 31, 2000 EXHIBIT 24.0 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned directors (each, a "Signatory") of Meridian Medical Technologies, Inc., a corporation organized under the laws of the state of Delaware (the "Company"), hereby constitutes and appoints James H. Miller, Dennis O'Brien and Michael McGuire (each, an "Agent", and collectively, "Agents") or any of them, his true and lawful attorney-in-fact and agent for and in his name, place and stead, in any and all capacities, to sign the Company's Annual Report on Form 10-K for the year ended July 31, 2000 and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission. Each Signatory further grants to the Agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary, in the judgment of such Agent, to be done in connection with any such signing and filing, as full to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all that said Agents, or any of them, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which constitute but one and the same instrument. SIGNATURE DATE /s/ James H. Miller ____________________________ September 27, 2000 James H. Miller /s/ Bruce M. Dresner ____________________________ September 27, 2000 Bruce M. Dresner /s/ Robert G. Foster ____________________________ September 27, 2000 Robert G. Foster /s/ E. Andrews Grinstead, III ____________________________ September 27, 2000 E. Andrews Grinstead, III /s/ David L. Lougee ____________________________ September 27, 2000 David L. Lougee EX-27 5 a2028635zex-27.txt EXHIBIT 27
5 1,000 YEAR JUL-31-2000 AUG-1-1999 JUL-31-2000 364 0 7,753 (524) 8,061 18,809 23,261 (7,466) 44,685 11,223 16,823 0 0 300 13,791 44,685 54,607 54,607 (32,591) (32,591) (14,667) 0 (3,301) 3,813 (1,514) 2,299 0 0 0 2,299 0.77 0.70
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