Meridian Bioscience (VIVO) 10-Q 2004 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2004

OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to
Commission file number 0-14902

MERIDIAN BIOSCIENCE, INC.

Incorporated under the laws of Ohio 31-0888197

(I.R.S. Employer Identification No.)

3471 River Hills Drive
Cincinnati, Ohio 45244
(513) 271-3700

Indicate by check 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 (ü) No (   )

Indicate by check whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes (ü) No (   )

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding April 30, 2004
Common Stock, no par value		14,897,890

Page 1 of 25

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q

		Page(s)
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Operations Three Months Ended March 31, 2004 and 2003 Six Months Ended March 31, 2004 and 2003		3
	Consolidated Statements of Cash Flows Six Months Ended March 31, 2004 and 2003		4
	Consolidated Balance Sheets March 31, 2004 and September 30, 2003		5-6
	Consolidated Statement of Changes in Shareholders’ Equity Six Months Ended March 31, 2004		7
	Notes to Consolidated Financial Statements		8-12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13-20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		20
Item 4.	Controls and Procedures		20
PART II.	OTHER INFORMATION
Item 5.	Other Information		21
Item 6.	Exhibits and Reports on Form 8-K		21
Signature			22
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements accompanied by meaningful cautionary statements. Except for historical information, this report contains forward-looking statements which may be identified by words such as “estimates”, “anticipates”, “projects”, “plans”, “excepts”, “intents”, “believes”, “should” and similar expressions or the negative versions thereof and which also may be identified by their context. Such statements are based upon current expectations of the Company and speak only as of the date made. The Company assumes no obligation to publicly update any forward-looking statements. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ, including, without limitation, the following: Meridian’s continued growth depends in part, on its ability to introduce into the marketplace enhancements of existing products or new products that incorporate technological advances, meet customer requirements and respond to products developed by Meridian’s competition. While Meridian has introduced a number of internally-developed products, there can be no assurance that it will be successful in the future in introducing such products on a timely basis. Ongoing consolidations of reference laboratories and formation of multi-hospital alliances may cause adverse changes to pricing and distribution. Costs and difficulties in complying with laws and regulations administered by the United States Food and Drug Administration can result in unanticipated expenses and delays and interruptions to the sale of new and existing products. Changes in the relative strength or weakness of the U.S. dollar can change expected results. One of Meridian’s main growth strategies is the acquisition of companies and product lines. There can be no assurance that additional acquisitions will be consummated or that, if consummated, will be successful and the acquired businesses successfully integrated into Meridian’s operations.

Page 2 of 25

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)

	Three Months						Six Months
	Ended March 31,						Ended March 31,
	2004			2003			2004			2003
NET SALES	$	20,940		$	16,913		$	39,106		$	33,016
COST OF SALES		8,907			6,852			16,956			13,793
Gross profit		12,033			10,061			22,150			19,223
OPERATING EXPENSES:
Research and development		1,195			1,064			2,167			1,975
Sales and marketing		3,268			2,671			6,304			5,456
General and administrative		3,589			2,542			6,505			5,246
Total operating expenses		8,052			6,277			14,976			12,677
Operating income		3,981			3,784			7,174			6,546
OTHER INCOME (EXPENSE):
Interest income		—			5			7			21
Interest expense		(474	)		(435	)		(840	)		(883	)
Other, net		25			(75	)		15			(40	)
Total other income (expense)		(449	)		(505	)		(818	)		(902	)
Earnings before income taxes		3,532			3,279			6,356			5,644
INCOME TAX PROVISION		1,243			1,356			2,272			2,297
NET EARNINGS	$	2,289		$	1,923		$	4,084		$	3,347
BASIC EARNINGS PER COMMON SHARE	$	0.15		$	0.13		$	0.28		$	0.23
DILUTED EARNINGS PER COMMON SHARE	$	0.15		$	0.13		$	0.27		$	0.23
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC		14,869			14,650			14,821			14,643
DILUTIVE COMMON STOCK OPTIONS		415			226			404			177
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED		15,284			14,876			15,225			14,820
ANTI-DILUTIVE SECURITIES:
Common stock options		138			375			187			539
Shares from convertible debentures		1,021			1,243			1,021			1,243
DIVIDENDS DECLARED PER COMMON SHARE	$	0.10		$	0.09		$	0.19		$	0.16

The accompanying notes are an integral part of these consolidated financial statements.

Page 3 of 25

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)

Six Months Ended March 31,	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	4,084		$	3,347
Non cash items:
Depreciation of property, plant and equipment		1,314			1,142
Amortization of intangible assets and deferred costs		808			690
Stock based compensation		3			6
Deferred income taxes		(87	)		718
Change in current assets excluding cash and deferred taxes		(1,702	)		(581	)
Change in current liabilities, excluding debt obligations		(1,540	)		1,430
Other		407			398
Net cash provided by operating activities		3,287			7,150
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(1,122	)		(798	)
Viral Antigens earnout payments		(456	)		(1,407	)
Net cash used for investing activities		(1,578	)		(2,205	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net activity on revolving credit facility		4,596			(1,301	)
Repayment of debt obligations		(5,299	)		(1,345	)
Debt issuance costs paid		(311	)		—
Dividends paid		(2,819	)		(2,344	)
Common stock issuance costs paid		(36	)		—
Proceeds from exercise of stock options		1,086			95
Net cash used for financing activities		(2,783	)		(4,895	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(43	)		210
NET INCREASE (DECREASE) IN CASH		(1,117	)		260
CASH AT BEGINNING OF PERIOD		2,683			3,060
CASH AT END OF PERIOD	$	1,566		$	3,320
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes paid	$	2,638		$	339
Interest		746			891
Non-cash transactions:
Debenture exchange		3,889			—

The accompanying notes are an integral part of these consolidated financial statements.

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Page 4 of 25

Consolidated Balance Sheets (Unaudited)
(dollars in thousands)

ASSETS

	March 31,		September 30,
	2004		2003
CURRENT ASSETS:
Cash (includes $600 that is restricted)	$	1,566	$	2,683
Accounts receivable, less allowance of $465 and $471 for doubtful accounts		15,952		14,894
Inventories		14,821		14,066
Deferred income taxes		153		216
Other current assets		1,191		1,302
Total current assets		33,683		33,161
PROPERTY, PLANT AND EQUIPMENT:
Land		694		688
Buildings and improvements		15,236		15,183
Machinery, equipment and furniture		19,480		18,035
Construction in progress		89		838
Subtotal		35,499		34,744
Less-accumulated depreciation and amortization		18,113		17,194
Net property, plant and equipment		17,386		17,550
OTHER ASSETS:
Deferred debenture offering costs, net		492		382
Goodwill		4,983		4,991
Other intangible assets, net		9,600		10,207
Other assets		112		129
Total other assets		15,187		15,709
TOTAL ASSETS	$	66,256	$	66,420

The accompanying notes are an integral part of these consolidated balance sheets.

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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands)

LIABILITIES AND SHAREHOLDERS’ EQUITY

	March 31,			September 30,
	2004			2003
CURRENT LIABILITIES:
Current portion of long-term obligations	$	524		$	879
Borrowings under revolving credit facility		5,059			463
Accounts payable		2,134			2,271
Accrued payroll costs		3,067			4,534
Purchase business combination liability		—			463
Other accrued expenses		3,362			3,001
Income taxes payable		3,497			3,719
Total current liabilities		17,643			15,330
LONG-TERM DEBT:
Bank debt		624			1,505
Convertible subordinated debentures		16,000			20,000
DEFERRED INCOME TAXES		1,951			2,101
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 1,000,000 shares authorized; none issued		—			—
Common stock, no par value, 50,000,000 shares authorized; 14,894,290 and 14,728,590 shares issued, respectively, stated at		2,535			2,535
Treasury stock, 8,300 shares		(32	)		(32	)
Additional paid-in capital		22,694			21,641
Retained earnings		5,195			3,930
Accumulated other comprehensive loss		(354	)		(590	)
Total shareholders’ equity		30,038			27,484
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	66,256		$	66,420

The accompanying notes are an integral part of these consolidated balance sheets.

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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)
(dollars and shares in thousands)

																	Accumulated
	Common		Shares								Additional						Other					Total
	Shares		Held in			Common		Treasury			Paid-in			Retained			Comprehensive			Comprehensive		Shareholders’
	Issued		Treasury			Stock		Stock			Capital			Earnings			Income (Loss)			Income (Loss)		Equity
Balance at September 30, 2003		14,729		(8	)	$	2,535	$	(32	)	$	21,641		$	3,930		$	(590	)			$	27,484
Dividends paid		—		—			—		—			—			(2,819	)		—					(2,819	)
Exercise of stock options		165		—			—		—			1,086			—			—					1,086
Stock based compensation		—		—			—		—			3			—			—					3
S-3 registration costs		—		—			—		—			(36	)		—			—					(36	)
Comprehensive income:
Net income		—		—			—		—			—			4,084			—		$	4,084		4,084
Foreign currency translation adjustment		—		—			—		—			—			—			236			236		236
Comprehensive income																				$	4,320
Balance at March 31, 2004		14,894		(8	)	$	2,535	$	(32	)	$	22,694		$	5,195		$	(354	)			$	30,038

The accompanying notes are an integral part of these consolidated financial statements.

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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation:

The consolidated financial statements included herein have not been audited by independent public accountants, but include all adjustments (consisting of normal recurring entries), which are, in the opinion of management, necessary for a fair presentation of the results for such periods.

Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles has been omitted pursuant to the requirements of the Securities and Exchange Commission, although Meridian believes that the disclosures included in these financial statements are adequate to make the information not misleading.

It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto, included in Meridian’s Annual Report on Form 10-K for the Year Ended September 30, 2003.

The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year.

2. Significant Accounting Policies:

(a) Translation of Foreign Currency -

Assets and liabilities of foreign operations are translated using period-end exchange rates with gains or losses resulting from translation included in a separate component of accumulated other comprehensive income (loss). Revenues and expenses are translated using exchange rates prevailing during the period. Meridian also recognizes foreign currency transaction gains and losses on certain assets and liabilities that are denominated in the Euro currency. These gains and losses are included in other income and expense in the accompanying consolidated statements of operations.

Foreign currency translation is the only component of accumulated other comprehensive income (loss). Comprehensive income for the interim periods ended March 31 was as follows:

	Three Months					Six Months
	Ended March 31,					Ended March 31,
	2004			2003		2004		2003
Net income	$	2,289		$	1,923	$	4,084	$	3,347
Foreign currency translation		(172	)		132		236		319
Comprehensive income	$	2,117		$	2,055	$	4,320	$	3,666

(b) Stock-based Compensation -

Page 8 of 25

Meridian accounts for its stock-based compensation plans pursuant to the intrinsic value method provided in APB Opinion No. 25. Had compensation cost for these plans been determined using the fair value method provided in SFAS No. 123, Meridian’s net income and earnings per share would have been reduced to the following pro forma amounts (amounts in thousands, except per share data):

	Three Months						Six Months
	Ended March 31,						Ended March 31,
	2004			2003			2004			2003
Net income as reported	$	2,289		$	1,923		$	4,084		$	3,347
Stock-based compensation included in net income as reported, after tax		—			—			2			4
Pro forma fair value of stock options, after tax		(85	)		(178	)		(221	)		(303	)
Pro forma net income	$	2,204		$	1,745		$	3,865		$	3,048
Basic EPS as reported	$	0.15		$	0.13		$	0.28		$	0.23
Stock-based compensation included in net income as reported, after tax		—			—			—			—
Pro forma fair value of stock options, after tax		(0.00	)		(0.01	)		(0.02	)		(0.02	)
Pro forma basic EPS	$	0.15		$	0.12		$	0.26		$	0.21
Diluted EPS as reported	$	0.15		$	0.13		$	0.27		$	0.23
Stock-based compensation included in net income as reported, after tax		—			—			—			—
Pro forma fair value of stock options, after tax		(0.01	)		(0.01	)		(0.02	)		(0.02	)
Pro forma diluted EPS	$	0.14		$	0.12		$	0.25		$	0.21

(c) New Accounting Pronouncements -

During March 2004, the Financial Accounting Standards Board issued an Exposure Draft of its proposed standard on accounting for stock based compensation for awards (e.g., stock options) issued to employees. The proposed standard requires, among other things, that compensation cost be measured at grant date fair value and charged to expense. Due to the absence of observable market prices for employee stock options, the standard indicates that the fair value of most stock options would be determined using an option-pricing model. The standard indicates that a lattice model (i.e., Binomial) is the required model. The proposed standard also addresses accounting for employee stock purchase plans where the employee’s purchase price is at a discount from the current market price. Such plans would become compensatory under the proposed standard. The proposed standard would be effective for public companies for fiscal years beginning after December 15, 2004, which for Meridian would be its fiscal year 2006.

During January 2003, the Financial Accounting Standards Board issued Interpretation No. 46,Consolidation of Variable Interest Entities, an Interpretation of ARB 51. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51,Consolidated Financial Statements,to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB revised FIN 46 for certain implementation provisions and extended the effective date of the pronouncement. FIN No. 46 and its subsequent revisions have had no impact on Meridian because it does not have ownership interests in any variable interest entities. All of Meridian’s consolidated subsidiaries are wholly-owned by Meridian.

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3. Inventories:

Inventories are comprised of the following (amounts in thousands):

	March 31,		September 30,
	2004		2003
Raw materials	$	4,633	$	3,896
Work-in-process		4,737		5,329
Finished goods		5,451		4,841
	$	14,821	$	14,066

4. Segment Information:

Meridian’s reportable operating segments are US Diagnostics, European Diagnostics and Life Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostics test kits in the US and countries outside of Europe, Africa and the Middle East. The European Diagnostics operating segment consists of the sale and distribution of diagnostics test kits in Europe, Africa and the Middle East. The Life Science operating segment consists of manufacturing operations in Memphis, Tennessee and Saco, Maine, and the sale and distribution of bulk antigens, antibodies and bioresearch reagents domestically and abroad. The Life Science operating segment consists of the Viral Antigens and BIODESIGN subsidiaries, including the protein production laboratory.

Segment information for the interim periods ended March 31, 2004 and 2003 is as follows (in thousands):

	US		European		Life
	Diagnostics		Diagnostics		Science		ELIM(1)			Total
Three Months – 2004
Net sales -
Third-party	$	11,735	$	4,266	$	4,939	$	—		$	20,940
Inter-segment		1,566		—		194		(1,760	)		—
Operating income		2,231		539		1,070		141			3,981
Total assets (March 31, 2004)		61,830		10,962		22,758		(29,294	)		66,256
Three Months – 2003
Net sales -
Third-party	$	9,752	$	3,831	$	3,330	$	—		$	16,913
Inter-segment		1,659		—		275		(1,934	)		—
Operating income		2,228		917		567		72			3,784
Total assets (September 30, 2003)		63,941		10,489		22,232		(30,242	)		66,420
Six Months – 2004
Net sales -
Third-party	$	24,932	$	7,533	$	6,641	$	—		$	39,106
Inter-segment		3,000		4		363		(3,367	)		—
Operating income		5,848		730		651		(55	)		7,174
Six Months – 2003
Net sales -
Third-party	$	20,405	$	6,873	$	5,738	$	—		$	33,016
Inter-segment		2,868		—		520		(3,388	)		—
Operating income		4,490		1,352		679		25			6,546

Page 10 of 25

⁽¹⁾ Eliminations consist of intersegment transactions.

Transactions between segments are accounted for as intercompany sales at established intercompany prices for internal and management purposes with all intercompany amounts eliminated in consolidation. Total assets for US Diagnostics and Life Science include goodwill of $2,063,000 and $2,920,000, respectively at March 31, 2004 and $2,063,000 and $2,927,000, respectively at September 30, 2003.

5. Intangible Assets:

A summary of Meridian’s acquired intangible assets subject to amortization, as of March 31, 2004 and September 30, 2003 is as follows:

	March 31, 2004				September 30, 2003
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Value		Amortization		Value		Amortization
Covenants not to compete	$	800	$	800	$	800	$	773
Core products		3,199		1,382		3,199		1,287
Manufacturing technologies		5,747		2,840		5,747		2,668
Trademarks, licenses and patents		1,820		1,214		1,820		1,146
Customer lists and supply agreements		7,367		3,097		7,367		2,852
	$	18,933	$	9,333	$	18,933	$	8,726

The aggregate amortization expense for these intangible assets for the three months ended March 31, 2004 and 2003 was $297,000 and $310,000, respectively. The aggregate amortization expense for these intangible assets for the six months ended March 31, 2004 and 2003 was $607,000 and $622,000, respectively.

6. Debenture Exchange and Redemption Transactions:

At December 31, 2003, Meridian had outstanding $20,000,000 of its 7% convertible subordinated debentures due in September 2006. During the second quarter of fiscal 2004, Meridian completed the exchange of $3,889,000 of its 7% convertible subordinated debentures for an equal principal amount of new convertible subordinated debentures that mature September 1, 2013 and bear interest at 5%. The new debentures are convertible into Meridian’s common stock at a price of $14.50 per share. Costs to complete the transaction, $311,000, are being amortized to interest expense over the life of the new 5% convertible subordinated debentures.

During the second quarter of fiscal 2004, Meridian also redeemed $4,000,000 of its remaining convertible subordinated debentures with borrowings from its revolving credit facility.

The carrying value of unamortized debt issuance costs related to the 7% convertible subordinated debentures that were extinguished, $130,000, was charged to interest expense during the second quarter of fiscal 2004. After the effect of the exchange and redemption transactions, Meridian has outstanding $12,111,000 of its 7% convertible subordinated debentures and $3,889,000 of its 5% convertible subordinated debentures.

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7. FDA Matters:

(a) FDA -

In June 2001, Meridian received a Warning Letter from the FDA, which summarized certain quality system deficiencies observed during a January 2001 inspection. Two follow-up FDA audits and two independent third-party audits have been conducted since that time. The FDA now considers Meridian’s quality system to be in substantial compliance with the regulations and has removed Meridian from Official Action Indicated status.

The FDA Warning Letter of 2001 directed Meridian to undergo three annual independent audits. The requirement for the third independent audit has been waived by the FDA.

(b) Department of Health and Human Services -

Meridian has been notified by the Office of Inspector General of the Department of Health and Human Services of failure to comply with recently effective registration requirements concerning two select agents (pathogen/toxin). Meridian and the agency have reached agreement on a resolution to the matter, the outcome of which has no material impact on the financial statements.

(c) Animal Products and By-products -

Some of Meridian’s products sold for further manufacturing use contain blood or blood by-products from animals such as cattle, goats, or sheep. The European Community and certain other foreign governments have placed additional importation restrictions on these products unless they are certified by the USDA, prior to exportation, to be free from communicable diseases. To date, Meridian believes it has complied with all international and USDA requirements for exportation of these products.

8. Commitments and Contingencies:

(a) Royalties -

Meridian has entered into various license agreements that require payment of royalties based on a specified percentage of sales of related products (1% to 8%). For one of these license agreements, Meridian was engaged in a dispute with the licensor regarding the payment of royalties. During April 2004, this dispute was resolved resulting in no material impact to the financial statements.

(b) Forward Contracts -

Meridian uses forward contracts from time to time to address foreign currency risk related to certain transactions denominated in the Euro currency. These contracts are used to fix the exchange rate in converting Euros to US dollars. As of March 31, 2004, Meridian was a party to two such forward contracts with an aggregate notional amount of 600,000 Euro. These contracts mature during the third quarter of fiscal 2004.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Refer to “Forward Looking Statements” following the Index in front of this Form 10-Q.

Current Trends:

US Diagnostics

During the second quarter, Meridian launched its ImmunoCardSTAT!® HpSA rapid diagnostic test for H.pyloriin domestic markets, following FDA 510(k) clearance in December 2003. This rapid detection test is intended to complement Meridian’s previously developed Premier Platinum HpSA diagnostic test.

During the first quarter, major outbreaks of influenza occurred across the US, resulting in significant sales growth of respiratory products such as influenza, RSV and mycoplasma. Although this trend continued somewhat into January, outbreaks of influenza subsided during the second quarter.

European Diagnostics

Sales for Meridian’s European Diagnostics operating segment during the second quarter of fiscal 2004 increased 11% compared to the second quarter of fiscal 2003, primarily driven by currency translation related to the strengthening of the Euro. Sales in local currency decreased 3% for the second quarter of fiscal 2004. Competitive factors and government reimbursement policies have continued to affect the growth opportunities in European markets. In response to these market conditions, Meridian is adjusting its European sales personnel to align with markets that are experiencing positive sales growth.

Life Science

During the first quarter of fiscal 2004, the Life Science operating segment incurred an operating loss, primarily driven by one customer, who was experiencing delays in taking delivery of certain make-to-order bulk antigen from Meridian. These delays were not related to the quality of Meridian’s product. This customer began taking delivery of bulk antigen from Meridian during March, and as a result, the operating loss from the first quarter was recouped during the second quarter.

During the second quarter of fiscal 2003, Meridian opened its protein production laboratory for commercial operation. During the first quarter of fiscal 2004, Meridian commenced work on the National Institutes of Health contract for the development and bulk manufacturing of a recombinant protein for a vaccine for parvovirus. This contract is expected to be completed during the fourth quarter of fiscal 2004. Work for other contracts is expected to commence during the fourth quarter of fiscal 2004. Revenues for the protein production laboratory are recognized either upon shipment of product or final lot acceptance depending on contract terms. To date, no revenues have been recognized for the protein production laboratory.

Research and Development

Meridian believes that internally-developed products will continue to be a critical source of sales and sales growth. Research and development efforts are expected to focus on the development of new products and product improvements where Meridian has a dominant market position, or its intellectual property is protected by patents or licenses. In addition to the recent launch of ImmunoCardSTAT!® HpSA in domestic markets, the research and development pipeline is expected to yield near-term new product

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introductions for certain respiratory and gastrointestinal diseases.

Meridian expects its Life Science operating segment will serve as a key platform for sourcing biologicals and technologies, by acquisition or license, for development of new products for all of Meridian’s operating segments. One of Meridian’s specific strategies in this area is to target biologicals that have commercial product applications across multiple markets, such as human diagnostics, veterinary diagnostics and therapeutics. This strategy is expected to leverage research and development resources as products can be developed with all three markets in mind, rather than on a market-by-market basis.

Operating Segments:

Meridian’s reportable operating segments are US Diagnostics, European Diagnostics and Life Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits in the US and countries outside of Europe, Africa and the Middle East. The European Diagnostics operating segment consists of the sale and distribution of diagnostic test kits in Europe, Africa and the Middle East. The Life Science operating segment consists of manufacturing operations in Memphis, Tennessee and Saco, Maine, and the sale and distribution of bulk antigens, antibodies and bioresearch reagents domestically and abroad. The Life Science operating segment consists of the Viral Antigens and BIODESIGN subsidiaries, including the protein production laboratory.

Results of Operations:

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

Net sales

Overall, net sales increased 24% for the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003. Net sales for the US Diagnostics operating segment increased $1,983,000, or 20%, for the European Diagnostics operating segment increased $435,000, or 11%, and for the Life Science operating segment increased $1,609,000, or 48%.

For the US Diagnostics operating segment, the sales increase was primarily related to volume growth in respiratory products. Meridian’s respiratory products include diagnostic tests for influenza, RSV and mycoplasma. Also contributing to the sales growth were favorable volume increases for H.pylori products, both Premier Platinum HpSA and the recently launched ImmunoCard STAT!® HpSA rapid test, C.difficileproducts and Rotavirus products. The US Diagnostics segment began selling Premier Platinum HpSA into Japan during the fourth quarter of fiscal 2003, resulting in some of the volume increase mentioned above. Government reimbursement policies result in a lower average selling price in this market for this product.

For the European Diagnostics operating segment, the sales increase includes currency translation in the amount of $573,000. Sales in local currency, the Euro, decreased 3%, following a 12% decline during the first quarter.

For the Life Science operating segment, Meridian previously reported that one customer was experiencing delays in taking delivery of make-to-order bulk antigen product and that such delays were not related to the quality of Meridian’s product. This customer began taking delivery of bulk antigen product during March, and as a result, the operating loss incurred during the first quarter was recouped during the second quarter.

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Also contributing to the sales growth were volume increases for other make-to-order bulk antigens and antibodies.

For all operating segments combined, international sales were $7,275,000, or 35% of total sales, for the second quarter of fiscal 2004, compared to $6,786,000, or 40% of total sales, for the second quarter of fiscal 2003. Combined domestic exports for the US Diagnostics and Life Science operating segments were $3,009,000 for the second quarter of fiscal 2004, compared to $2,955,000 for the second quarter of fiscal 2003. The remaining international sales were generated by the European Diagnostics operating segment.

Gross Profit

Gross profit increased 20% for the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003. Gross profit margins were 57% for the second quarter of fiscal 2004 compared to 59% for the second quarter of fiscal 2003.

Meridian’s overall operations consist of the sale of diagnostic test kits for various disease states and in alternative test formats, as well as bioresearch reagents, bulk antigens and proficiency tests. Product sales mix shifts, in the normal course of business, can cause the consolidated gross profit margin to fluctuate by several points.

Operating Expenses

Operating expenses increased 28% for the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003. The overall increase in operating expenses for the second quarter of fiscal 2004 is discussed below.

Research and development expenses increased 12% for the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003, and as a percentage of sales, were 6% for both the second quarter of fiscal 2004 and fiscal 2003. This increase primarily related to the US Diagnostics operating segment and was attributable to additional product development staff and materials for new product development activities. Human resources were added to the research and development staff throughout fiscal 2003. Such resources were in place for the entire second quarter of fiscal 2004. This investment in research and development has already resulted in one new product launch in fiscal 2004, the ImmunoCardSTAT!® HpSA rapid test, and additional new product launches are expected in the third and fourth quarters of fiscal 2004.

Selling and marketing expenses increased 22% for the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003, and as a percentage of sales, were 16% for both the second quarter of fiscal 2004 and fiscal 2003. Of this increase, $407,000 related to the US Diagnostics operating segment, $141,000 related to the European Diagnostics operating segment and $49,000 related to the Life Science operating segment. The increase for the US Diagnostics operating segment was primarily attributable to higher sales commissions related to sales growth, and the addition of a Vice President of Sales and one new product manager. The increase for the European Diagnostics operating segment was primarily due to currency translation.

General and administrative expenses increased 41% for the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003, and as a percentage of sales, increased from 15% for the second quarter of fiscal 2003, to 17% for the second quarter of fiscal 2004. Of this increase, $542,000 related to the US Diagnostics operating segment, $385,000 related to the European Diagnostics operating segment and

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$120,000 related to the Life Science operating segment. The increase for the US Diagnostics operating segment was primarily attributable to favorable adjustments to the bad debt reserve that occurred in fiscal 2003 and legal and professional spending on certain strategic initiatives. The increase for the European Diagnostics operating segment was primarily attributable to currency translation and a favorable reserve adjustment in fiscal 2003 related to a contract amendment.

Operating Income

Operating income increased 5% for the second quarter of fiscal 2004, as a result of the factors discussed above.

Other Income and Expense

Interest expense for the second quarter of fiscal 2004 increased 9%, or $39,000, compared to the second quarter of fiscal 2003. This increase includes a write-off of deferred issuance costs in the amount of $130,000 related to the debenture exchange and redemption transactions discussed under Liquidity and Capital Resources below. Overall average debt levels outstanding for the revolving credit facility and bank term debt were lower during the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003, resulting in lower interest expense before consideration of the write-off of deferred issuance costs mentioned above.

Income Taxes

The effective rate for income taxes was 35% for the second quarter of fiscal 2004 compared to 41% for the second quarter of fiscal 2003. The decline in the effective tax rate related to federal and state tax credits for research and development activities. For the fiscal year ending September 30, 2004, Meridian expects the effective tax rate to approximate 37%.

Six Months Ended March 31, 2004 Compared to Six Months Ended March 31, 2003

Net sales

Overall, net sales increased 18% for the first six months of fiscal 2004 compared to the first six months of fiscal 2003. Net sales for the US Diagnostics operating segment increased $4,527,000, or 22%, for the European Diagnostics operating segment increased $660,000, or 10%, and for the Life Science operating segment increased $903,000, or 16%.

For the US Diagnostics operating segment, the sales increase was primarily related to volume growth in respiratory products, driven from outbreaks of influenza across the US, primarily during the first quarter. Meridian’s respiratory products include diagnostic tests for influenza, RSV, and mycoplasma. Also contributing to the sales growth were favorable volume increases for H.pyloriproducts, both Premier Platinum HpSA and the recently launched ImmunoCardSTAT!® HpSA rapid test, and Rotavirus products. The US Diagnostics segment began selling Premier Platinum HpSA into Japan during the fourth quarter of fiscal 2003, resulting in some of the volume increase mentioned above. Government reimbursement policies result in a lower average selling price in this market for this product. The increases mentioned above were also somewhat offset by volume and price declines in the first quarter in specimen transport products, driven from buying patterns of certain distributors and price competition.

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For the European Diagnostics operating segment, the sales increase includes currency translation in the amount of $1,044,000. Sales in local currency, the Euro, decreased 6%.

For the Life Science operating segment, the sales increase was primarily attributable to volume growth in make-to-order bulk antigens and antibodies.

For all operating segments combined, international sales were $11,749,000, or 30% of total sales, for the first six months of fiscal 2004, compared to $11,061,000, or 34% of total sales, for the first six months of fiscal 2003. Combined domestic exports for the US Diagnostics and Life Science operating segments were $4,216,000 for the first six months of fiscal 2004, compared to $4,188,000 for the first six months of fiscal 2003. The remaining international sales were generated by the European Diagnostics operating segment.

Gross Profit

Gross profit increased 15% for the first six months of fiscal 2004 compared to the first six months of fiscal 2003. Gross profit margins were 57% for the first six months of fiscal 2004 compared to 58% for the first six months of fiscal 2003.

Meridian’s overall operations consist of the sale of diagnostic test kits for various disease states and in alternative test formats, as well as bioresearch reagents, bulk antigens and proficiency tests. Product sales mix shifts, in the normal course of business, can cause the consolidated gross profit margin to fluctuate by several points.

Operating Expenses

Operating expenses increased 18% for the first six months of fiscal 2004 compared to the first six months of fiscal 2003. The overall increase in operating expenses for the first six months of fiscal 2004 is discussed below.

Research and development expenses increased 10% for the first six months of fiscal 2004 compared to the first six months of fiscal 2003, and as a percentage of sales, were 6% for both the first six months of fiscal 2004 and fiscal 2003. This increase primarily related to the US Diagnostics operating segment and was attributable to additional product development staff and materials for new product development activities. Human resources were added to the research and development staff throughout fiscal 2003. Such resources were in place for the entire six months of fiscal 2004. This investment in research and development has already resulted in one new product launch in fiscal 2004, the ImmunoCardSTAT!® HpSA rapid test, and additional new product launches are expected in the third and fourth quarters of fiscal 2004.

Selling and marketing expenses increased 16% for the first six months of fiscal 2004 compared to the first six months of fiscal 2003, and as a percentage of sales, decreased from 17% in fiscal 2003, to 16% in fiscal 2004. Of this increase, $506,000 related to the US Diagnostics operating segment, $253,000 related to the European Diagnostics operating segment and $89,000 related to the Life Science operating segment. The increase for the US Diagnostics operating segment was primarily attributable to higher sales commissions related to sales growth, and the addition of a Vice President of Sales and one new product manager. The increase for the European Diagnostics operating segment was primarily due to currency translation.

General and administrative expenses increased 24% for the first six months of fiscal 2004 compared to the first six months of fiscal 2003, and as a percentage of sales, increased from 16% for the first six months of

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fiscal 2003, to 17% for the first six months of fiscal 2004. Of this increase, $595,000 related to the US Diagnostics operating segment, $543,000 related to the European Diagnostics operating segment and $121,000 related to the Life Science operating segment. The increase for the US Diagnostics operating segment was primarily attributable to favorable adjustments to the bad debt reserve that occurred in fiscal 2003 and legal and professional spending on certain strategic initiatives. The increase for the European Diagnostics operating segment was primarily due to currency translation and a favorable reserve adjustment in fiscal 2003 related to a contract amendment.

Operating Income

Operating income increased 10% for the first six months of fiscal 2004, as a result of the factors discussed above.

Other Income and Expense

Interest expense declined 5%, or $43,000, for the first six months of fiscal 2004 compared to the first six months of fiscal 2003. This decrease was primarily attributable to lower overall debt levels outstanding for the revolving credit facility and bank term debt, somewhat offset by a write-off of deferred issuance costs in the amount of $130,000 related to the debenture exchange and redemption transactions discussed under Liquidity and Capital Resources below.

Income Taxes

The effective rate for income taxes was 36% for the first six months of fiscal 2004 compared to 41% for the first six months of fiscal 2003. The decline in the effective tax rate related to federal and state tax credits for research and development activities. For the fiscal year ending September 30, 2004, Meridian expects the effective tax rate to approximate 37%.

Liquidity and Capital Resources:

Comparative Cash Flow Analysis

Meridian’s operating cash flow and financing requirements are determined by analyses of operating and capital spending budgets and consideration of acquisition plans. Meridian has historically maintained line of credit availability to respond to acquisition opportunities quickly.

Net cash provided by operating activities decreased 54% for the first six months of fiscal 2004 compared to the first six months of fiscal 2003. Although net earnings increased 22% for the first six months of fiscal 2004, investments in inventories for the Life Science operating segment and payments of fiscal 2003 incentive compensation and income taxes led to the overall decrease in net cash provided by operating activities.

Net cash used for investing activities decreased 28% for the first six months of fiscal 2004 compared to the first six months of fiscal 2003. This decrease was primarily attributable to a lower earnout payment for fiscal 2003 compared to fiscal 2002 for the Viral Antigens acquisition (see discussion below).

Net cash used for financing activities decreased 43% for the first six months of fiscal 2004 compared to the

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first six months of fiscal 2003. Repayments of debt obligations were $5,299,000 for the first six months of fiscal 2004, including $4,000,000 of 7% subordinated convertible debentures that were redeemed on March 31, 2004 (see discussion below). A substantial portion of the net decrease in cash used for financing activities is attributable to proceeds from the exercise of stock options. Meridian has issued approximately 165,000 shares of common stock upon exercise of stock options during the first six months of fiscal 2004, compared to approximately 21,000 shares during the first six months of fiscal 2003.

Net cash flows from operating activities are anticipated to fund working capital requirements, debt service and dividends during fiscal 2004.Capital Resources

The following table presents Meridian’s payments due on financing obligations as of March 31, 2004 (amounts in thousands):

	One		Two		Three		Four		Five		There-
	Year		Years		Years		Years		Years		after		Total
Bank term debt	$	499	$	499	$	125		—		—		—	$	1,123
Capital leases		25		—		—		—		—		—		25
Subordinated debentures		—		—		12,111		—		—		3,889		16,000

Meridian has a $25,000,000 credit facility with a commercial bank that includes $5,000,000 of term debt and capital lease capacity and a $20,000,000 line of credit that expires in September 2004. As of April 30, 2004, there was $1,823,000 outstanding on the line of credit portion of this facility, and the availability was $18,177,000. Meridian expects to renew this credit facility during the fourth quarter of fiscal 2004.

During the second quarter of fiscal 2004, Meridian completed the exchange of $3,889,000 of its 7% convertible subordinated debentures for an equal principal amount of new convertible subordinated debentures that mature September 1, 2013 and bear interest at 5%. The new debentures are convertible into Meridian’s common stock at a price of $14.50 per share. Costs to complete the exchange transaction, $311,000, are being amortized to interest expense over the life of new 5% convertible subordinated debentures.

During the second quarter of fiscal 2004, Meridian redeemed $4,000,000 of its remaining outstanding 7% convertible subordinated debentures. This redemption was funded from borrowings from the revolving credit facility. Meridian may commence future redemptions of remaining outstanding 7% convertible subordinated debentures.

The recently completed exchange and redemption transactions are expected to reduce annual interest expense by approximately $300,000. The carrying value of unamortized debt issuance costs related to the 7% convertible subordinated debentures that were extinguished, $130,000, was charged to expense during the second quarter of fiscal 2004.

All of the bank term debt is denominated in the Euro currency and bears interest at a variable rate tied to Euro LIBOR. A one-percentage point increase in the Euro LIBOR rate would increase fiscal 2004 interest expense by approximately $10,000 for this debt. This debt serves as a natural currency hedge against certain Euro denominated intercompany receivables.

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The Viral Antigens acquisition, completed in fiscal 2000, provides for additional purchase consideration up to a maximum remaining amount of $5,482,000, contingent upon Viral Antigens’ future earnings through September 30, 2006. Earnout consideration is payable each year, following the period earned. Earnout payments, if any, may require financing under the line of credit or other bank credit facility. Earnout consideration in the amount of $456,000 related to fiscal 2003 was paid in January 2004 from operating cash flows.

Meridian’s capital expenditures are estimated to be approximately $2,500,000 for fiscal 2004, and may be funded with operating cash flows or availability under the $25,000,000 credit facility discussed above. Capital expenditures relate to manufacturing and other equipment of a normal and recurring nature.

Commitments and Off-balance Sheet Arrangements:

See Note 8 to the consolidated financial statements contained herein.

Regulatory Matters:

See Note 7 to the consolidated financial statements contained herein.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Meridian has market risk exposure related to interest rate sensitive debt and foreign currency transactions.

Meridian has debt obligations in the aggregate amount of $22,207,000 outstanding at March 31, 2004, of which $6,182,000, including $5,059,000 on the revolving credit facility, bears interest at variable rates. Information concerning the maturities of interest rate sensitive debt is included in the discussion of Capital Resources above. To date, Meridian has not employed a hedging strategy with respect to interest rate risk.

Meridian is exposed to foreign currency risk related to its European distribution operations, including foreign currency denominated intercompany receivables, as well as Euro denominated term debt. The Euro denominated term debt serves as a natural hedge against a portion of the Euro denominated intercompany receivables.

ITEM 4. CONTROLS AND PROCEDURES

As of March 31, 2004, an evaluation was completed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) and 15(d)-15(b) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2004. There has been no change in the Company’s internal controls over financial reporting identified in connection with the evaluation of internal controls that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 5. Other Information

Meridian’s Annual Meeting of Shareholders was held on January 22, 2004. Each of the following matters was voted upon and approved by Meridian’s shareholders as indicated below:

(1)	Election of the following six directors:
	James A. Buzard, 12,488,018 votes for, zero votes against and 307,788 votes withheld.
	John A. Kraeutler, 12,492,969 votes for, zero votes against and 302,837 votes withheld.
	Gary P. Kreider, 11,623,520 votes for, zero votes against and 1,172,286 votes withheld.
	William J. Motto, 12,491,389 votes for, zero votes against and 304,417 votes withheld.
	David C. Phillips, 12,479,514 votes for, zero votes against and 316,292 votes withheld.
	Robert J. Ready, 12,502,791 votes for, zero votes against and 293,015 votes withheld.

Ratification of appointment of PricewaterhouseCoopers as Meridian’s independent public accountants for fiscal year 2004: 12,748,354 votes for, 26,773 votes against and 20,679 votes withheld.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

31.1	Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
31.2	Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
32.2	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

(b) Reports on Form 8-K:

     None.

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Signature:

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there-unto duly authorized.

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Date: May 14, 2004	/S/ Melissa Lueke
	Melissa Lueke
	Vice President and Chief Financial Officer

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