SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 0-14902
MERIDIAN DIAGNOSTICS, 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 a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding August 7, 2000
- ------------------------------------------- --------------------------------
Common Stock, no par value 14,585,588
1
The Company's Quarterly Report on Form 10-Q for the Period Ended June 30, 2000
contained an error related to the transformation of data from the Company's
electronic Microsoft Word format, to the Securities and Exchange Commission's
(SEC) EDGAR format. Specifically, net sales for the three-month periods ended
June 30, 2000 and 1999 are $14,340,000 and $13,562,000, respectively, rather
than $4,340,000 and $3,562,000, as originally transmitted via EDGAR. During the
transformation of data to the SEC's EDGAR format, the ten million digits were
erroneously truncated.
2
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q/A
Page(s)
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2000 and September 30, 1999 (Restated) 4-5
Consolidated Statements of Earnings
Three Months Ended June 30, 2000 and 1999 (Restated)
Nine Months Ended June 30, 2000 and 1999 (Restated) 6
Consolidated Statement of Shareholders' Equity
Nine Months Ended June 30, 2000 (Restated) 7
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2000 and 1999 (Restated) 8
Notes to Consolidated Financial Statements 9-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Exhibit 27 Financial Data Schedule 24-26
Exhibit 99 Forward Looking Statements 27
3
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Restated - Note 1)
(Unaudited)
($000)
ASSETS
CURRENT ASSETS: June 30, September 30,
2000 1999
(Restated)
---------- -------------
Cash and cash equivalents $ 4,984 $ 6,229
Investments 1,002 1,002
Accounts receivable and notes receivable,
less allowance of $402 in 2000 and
$380 in 1999 for doubtful accounts 14,293 12,508
Inventories 11,638 10,357
Prepaid expenses and other 614 1,086
Deferred tax assets 562 562
--------- ---------
Total current assets 33,093 31,744
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 357 969
Buildings and improvements 11,104 10,427
Machinery, equipment and furniture 12,751 11,986
Construction in progress 435 811
--------- ---------
Total property, plant and equipment 24,647 24,193
Less-accumulated depreciation and
amortization 11,295 9,987
--------- ---------
Net property, plant and equipment 13,352 14,206
--------- ---------
`
OTHER ASSETS:
Long term receivables and other 1,466 940
Deferred debenture offering costs,
net of accumulated amortization
of $508 in 2000 and $407 in 1999 821 922
Other intangible assets, net of
accumulated amortization of $11,082
in 2000 and $9,193 in 1999 18,991 20,760
Cost in excess of net assets acquired,
net of accumulated amoritization
of $901 in 2000 and $743 in 1999 3,427 3,589
--------- ---------
Total other assets 24,705 26,211
--------- ---------
TOTAL ASSETS $ 71,150 $ 72,161
========= =========
The accompanying notes are an integral part of these unaudited balance sheets.
4
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Restated - Note 1)
(Unaudited)
($000)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30
June 30, 1999
2000 (Restated)
---------- ------------
CURRENT LIABILITIES:
Current portion of long-term debt
and capital lease obligations $ 632 $ 821
Notes payable to bank - 3,354
Notes payable to third party - 1,000
Accounts payable 2,810 3,495
Accrued payroll and payroll taxes 1,350 2,154
Accrued expenses 2,971 2,778
Income taxes payable 1,404 -
---------- ----------
Total current liabilities 9,167 13,602
---------- ----------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 24,304 21,366
---------- ----------
DEFERRED TAX LIABILITIES 3,602 3,602
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value 1,000,000
shares authorized; none issued - -
Common stock, no par value, 50,000,000
shares authorized; 14,585,588 and
14,429,151 shares issued and
outstanding, respectively, stated at 2,529 2,424
Additional paid-in capital 20,922 20,855
Retained earnings 13,855 11,131
Accumulated other comprehensive loss (3,229) (819)
---------- ----------
Total shareholders' equity 34,077 33,591
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 71,150 $ 72,161
========== ==========
The accompanying notes are an integral part of these unaudited balance sheets.
5
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings (Restated - Note 1)
(Unaudited)
(000, Except Per Share Amounts)
Three Months Ended Nine Months Ended
June 30 June 30
---------------------- ---------------------
2000 1999 2000 1999
(Restated) (Restated)
-------- ---------- -------- ----------
NET SALES $14,340 $13,562 $43,246 $39,936
COST OF SALES 5,200 4,801 16,016 14,467
-------- -------- -------- --------
Gross profit 9,140 8,761 27,230 25,469
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 496 620 1,457 1,603
Selling and marketing 2,927 2,810 8,944 8,471
General and administrative 2,341 2,268 7,351 6,925
Merger integration costs - 630 - 1,842
-------- -------- -------- --------
Total operating expenses 5,764 6,328 17,752 18,841
-------- -------- -------- --------
Operating income 3,376 2,433 9,478 6,628
OTHER INCOME (EXPENSE):
Interest income 24 114 294 383
Interest expense (608) (646) (1,543) (1,837)
Other, net 282 (64) 335 (206)
-------- -------- -------- --------
Total other income (expense) (302) (596) (914) (1,660)
-------- -------- -------- --------
Earnings before income taxes 3,074 1,837 8,564 4,968
INCOME TAXES 1,190 741 3,361 2,062
======== ======== ======== ========
NET EARNINGS $ 1,884 $ 1,096 $ 5,203 $ 2,906
======== ======== ======== ========
BASIC WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 14,586 14,383 14,525 14,383
========= ======== ======== ========
BASIC EARNINGS PER
COMMON SHARE $ 0.13 $ 0.08 $ 0.36 $ 0.20
========= ======== ======== ========
DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 14,667 14,609 14,618 14,574
========= ======== ======== ========
DILUTED EARNINGS
PER COMMON SHARE $ 0.13 $ 0.08 $ 0.36 $ 0.20
========= ======== ======== ========
The accompanying notes are an integral part of these unaudited statements.
6
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity (Restated - Note 1)
For the Nine Months Ended June 30, 2000
(Shares and $ in 000)
Number of Accumulated
Shares Additional Other
Issued and Comprehensive Common Paid in Comprehensive Retained
Outstanding Income (Loss) Stock Capital (Loss) Earnings Total
------------ -------------- --------- ---------- -------------- ---------- ------
Balance at September 30,
1999 (Restated) 14,429 $ --- $2,424 $20,855 $ (819) $11,131 $33,591
Stock Options Exercises, net 157 --- 105 67 --- --- 172
Dividends --- --- --- --- --- (2,479) (2,479)
Comprehensive Income (loss)
Net income --- 5,203 --- --- --- 5,203 5,203
Other comprehensive income
(loss)
Foreign currency
translation adjustment --- (2,410) --- --- (2,410) --- (2,410)
-------
Comprehensive Income $ 2,793
=======
------ ------ -------- --------- -------- ------
Balance at June 30, 2000 14,586 $2,529 $20,922 $(3,229) $13,855 $34,077
====== ====== ======= ======== ======= ========
The accompanying notes are an integral part of these unaudited statements.
7
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Restated - Note 1)
(Unaudited)
($000)
Nine Months Ended
June 30,
-----------------------
2000 1999
(Restated)
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 5,203 2,906
Non cash items:
Depreciation of property,
plant and equipment 1,695 1,563
Gain on sale of Salt Lake
City facilities (292) -
Amortization of intangible
assets and deferred royalties 2,074 1,836
Deferred income taxes - (1,037)
Change in current assets and current
liabilities net of effects of
acquisition:
Change in current assets excluding
cash/cash equivalents and investments (3,964) 1,922
Change in current liabilities,
excluding current portion of
long-term obligations (658) (121)
Long-term receivable and other 423 208
---------- ----------
Net cash provided by operating activities 4,481 7,277
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Gull Laboratories, Inc.,
net of cash acquired - (18,440)
Purchase of property, plant
and equipment, net (3,309) (1,813)
Proceeds from sale of Salt
Lake City facilities 2,332 -
Proceeds from short term investments - 2,143
Purchase of product license and
other intangible assets (41) (200)
--------- ---------
Net cash used in investing activities (1,018) (18,310)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations 3,478 3,354
Repayment of debt obligations (5,605) (4,380)
Dividends paid (2,479) (2,157)
Proceeds from issuance of common stock 172 5
---------- ----------
Net cash used in financing activities (4,434) (3,178)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (274) (182)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,245) (14,393)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,229 19,400
========== ==========
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 4,984 $ 5,007
========== ==========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 2,931 $ 1,600
Interest 1,160 1,250
Non-cash items
Capital lease 522 -
The accompanying notes are an integral part of these unaudited statements.
8
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation:
The consolidated financial statements included herein have not been
examined by independent public accountants, but include all adjustments
(consisting of normal recurring entries) which are, in the opinion of
management, necessary for a fair presentation of the results for such
periods.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the requirements of the Securities
and Exchange Commission, although the Company believes that the disclosures
included in these financial statements are adequate to make the information
not misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the restated consolidated financial statements and notes
thereto included in the Company's latest Annual Report on Form 10-K/A.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the year.
The fiscal period 1999 financial statements included herein have been
restated to reflect the correction of a bookkeeping error which occurred in
June 1999 related to sales to the Company's German subsidiary. The impact
of this restatement to earnings for the three-month and nine-month periods
ended June 30, 1999 was as follows (amounts in thousands except per share
data):
Three Months Ended Nine Months Ended
June 30, 1999 June 30, 1999
------------------- ------------------
As As As As
Reported Restated Reported Restated
-------- -------- -------- --------
Net sales $13,825 $13,562 $40,199 $39,936
Gross profit 9,165 8,761 25,873 25,469
Operating income 2,837 2,433 7,032 6,628
Earnings before incomes taxes 2,241 1,837 5,372 4,968
Net earnings 1,345 1,096 3,155 2,906
Basic earnings per share 0.09 0.08 0.22 0.20
Dilutive earnings per share 0.09 0.08 0.22 0.20
The balance of retained earnings at June 30, 1999, as restated, was
decreased by $249,000 for this matter.
2. Acquisition of Gull Laboratories, Inc.:
On November 5, 1998, the Company acquired Gull Laboratories, Inc. (Gull)
for $19,700,000 in cash, including acquisition costs of $1,700,000. Gull
was engaged in the development, manufacture and marketing of high-quality
diagnostic test kits for the detection of infectious diseases and
autoimmune disorders. The acquisition was accounted for as a purchase. For
accounting purposes, the acquisition was effective on October 31, 1998 and
the results of operations of Gull are included in the consolidated results
of operations of the Company from that date forward.
9
The following unaudited pro forma combined results of operations for the
nine months ended June 30, 1999 assumes the Gull acquisition occurred as of
October 1, 1998. Pro forma adjustments consist of reductions in interest
income due to the use of cash and investments to fund the acquisition,
additional amortization of intangible assets and goodwill and adjustments
to the tax provision assuming the utilization of a portion of Gull U.S.
losses and the establishment of valuation reserves for potentially
unrealizable deferred tax assets related to pro forma European operating
losses.
The unaudited pro forma financial information presented is not necessarily
indicative of either the results of operations that would have occurred had
the acquisition taken place on October 1, 1998 or the results of operations
of the combined companies (amounts in thousands except per share data).
Net sales......................... $ 41,426
Net earnings..................... $ 2,979
Earnings per share:
Basic..................... $ 0.21
Diluted.................. $ 0.20
During fiscal 1999, research and development activities were consolidated
into Meridian's Cincinnati operations and production facilities in Germany
were shut down. The renovation of the Cincinnati facilities was completed
during the second quarter of fiscal 2000. The manufacture of Gull products
is now conducted in Cincinnati.
The former Gull headquarters and production facilities in Salt Lake City
were sold during the third quarter of fiscal 2000 for a net gain of
$292,000. The Company received net cash proceeds of $2,332,000 and a
secured note for $950,000. The note bears interest at 8%; is secured by the
real property in Salt Lake City; and matures on June 7, 2002.
Purchase liabilities recorded included approximately $1,400,000 for
severance and costs related to the shut down and consolidation of the
acquired facilities in Salt Lake City and Germany. This entire amount has
been paid as of June 30, 2000. In connection with the acquisition, the
Company agreed to pay certain amounts owed by Gull to its former parent
company. At September 30, 1999, $1,000,000 was recorded as a note payable
to third party representing the final amount payable to the former parent.
This note was paid on November 16, 1999.
The major components of the merger integration costs incurred during fiscal
1999 were as follows (amounts in thousands):
Three Months Nine Months
Ended Ended
June 30, June 30,
1999 1999
------------ -----------
Product validation costs $ 120 $ 240
Professional fees primarily related to
reorganization of European operations 115 275
Travel and training 68 425
Termination payments to distributors - 430
Other 327 472
====== ========
Total merger integration costs $ 630 $ 1,842
====== ========
Substantially all merger integration costs were paid as of September 30,
1999. Fiscal 2000 merger integration costs to date have been immaterial and
are expected to be immaterial for the remainder of fiscal 2000.
10
3. Inventories:
Inventories are comprised of the following (amounts in thousands):
June 30, 2000 September 30, 1999
------------- ------------------
Raw materials $ 3,295 $ 2,469
Work-in-process 4,358 3,211
Finished goods 3,985 4,677
======== ========
$ 11,638 $ 10,357
======== ========
4. Income Taxes:
The provisions for income taxes were computed at the estimated annualized
effective tax rates utilizing current tax law in effect in each taxable
jurisdiction. The realization of deferred tax assets related to net
operating loss benefits for European operations is dependent upon
generation of sufficient future taxable income from the successful
execution of tax-planning strategies. Management believes that it is more
likely than not, after consideration of the valuation allowance that has
been established, that the net amount of deferred tax assets related to net
operating loss benefits for European operations will be realized. However,
the amount of net deferred tax assets related to net operating loss
benefits for European operations could be reduced if the execution of
tax-planning strategies is not as successful as planned.
Earnings Per Common Share:
Basic earnings per share (EPS) is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding. Diluted EPS is computed by adding to the weighted average
number of common shares outstanding, the dilutive effect of additional
common shares that would have been outstanding if dilutive potential common
shares had been issued.
The table below shows the amounts used in computing earnings per share and
the effect of dilutive potential common stock on income and the weighted
average number of shares for the three and nine months ended June 30, 2000
and June 30, 1999, as restated.
11
THREE MONTHS ENDED
June 30, 2000 June 30, 1999 (Restated)
------------------------------------------- ---------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
In thousands,
except per share
amounts
---------------------
BASIC
EARNINGS PER
SHARE
Net income
available to common
shareholders $1,884 14,586 $0.13 $1,096 14,383 $0.08
-------- --------- -------- ------- ------- -------
EFFECT OF DILUTIVE
SECURITIES
Stock Options --- 81 --- --- 226 ---
-------- --------- -------- ------ ------- -------
DILUTED EARNINGS
PER SHARE
Net income
available to common
shareholders and
assumed conversions $1,884 14,667 $0.13 $1,096 14,609 $0.08
======== ========= ======== ====== ======= =======
12
THREE MONTHS ENDED
June 30, 2000 June 30, 1999 (Restated)
------------------------------------------- ---------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
In thousands,
except per share
amounts
---------------------
BASIC
EARNINGS PER
SHARE
Net income
available to common
shareholders
$5,203 14,525 $0.36 $2,906 14,383 $0.20
-------- --------- -------- ------ ------- -------
EFFECT OF DILUTIVE
SECURITIES
Stock Options - 93 - - 191 -
-------- --------- -------- ------ ------- -------
DILUTED EARNINGS
PER SHARE
Net income
available to common
shareholders and
assumed conversions $5,203 14,618 $0.36 $2,906 14,574 $0.20
======== ========= ======== ====== ======= =======
The following table outlines shares excluded from diluted EPS, as they
are anti-dilutive (amounts in thousands).
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- ------------------
2000 1999 2000 1999
----- ----- ----- -----
Options 411 442 402 481
Convertible debentures 1,243 1,243 1,243 1,243
----- ----- ----- -----
1,654 1,685 1,645 1,724
===== ===== ===== =====
At both June 30, 2000 and 1999, the impact of assuming the 1996
convertible debentures were converted, net of the impact of pro forma,
after tax interest expense, was anti-dilutive.
13
5. 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 loss.
Revenues and expenses are translated using exchange rates prevailing during
the period.
6. Comprehensive Income:
Comprehensive income is the total of net income and all other non-owner
changes in equity. For the Company, this reporting involves gains and
losses resulting from the translation of assets and liabilities of foreign
operations which are currently included in a separate component of
accumulated other comprehensive loss. Comprehensive income for the first
nine months of fiscal 2000 was a loss of $2,410,000.
7. Segment Information:
Meridian operates in two geographic segments: Meridian Diagnostics, Inc.
(MDI) and Meridian Diagnostics Europe (MDE). MDI operations consist of the
manufacture and sale of diagnostic test kits in the U.S. and countries
outside of Europe, Africa and the Middle East. It also includes sales of
bioresearch reagents and sales of proficiency tests, which combined,
represent approximately 10% of total Company revenues. MDE distributes
diagnostic test kits in Europe, Africa and the Middle East. Sales are
attributed to the geographic area based on the location from which the
product is shipped to the customer.
Segment information for the three and nine months ended June 30, 2000 and
1999 (restated) is as follows:
--------------------------------- -------- --------- ---------- --------
($ in thousands) MDI MDE ELIM(1) Total
--------------------------------- -------- --------- ---------- --------
Three months ended June 30, 2000
Net sales $ 12,271 $ 3,879 $ (1,810) $ 14,340
Operating income (loss) 3,140 (118) 354 3,376
Income tax provision (benefit) 1,009 23 158 1,190
Net earnings (loss) 2,131 (464) 217 1,884
Total assets 94,537 7,967 (31,354) 71,150
Three months ended June 30, 1999
Net sales $ 11,272 $ 3,496 $ (1,206) $ 13,562
Operating income (loss) 2,529 (154) (12) 2,433
Income tax provision (benefit) 987 (178) (68) 741
Net earnings (loss) 1,244 (168) 20 1,096
Total assets 84,253 15,731 (29,567) 70,417
14
--------------------------------- -------- -------- --------- -------
($ in thousands) MDI MDE ELIM(1) Total
--------------------------------- -------- -------- --------- -------
Nine months ended June 30, 2000
Net sales $37,308 $11,163 $ (5,225) $43,246
Operating income (loss) 9,474 (352) 356 9,478
Income tax provision (benefit) 3,312 (97) 146 3,361
Net earnings (loss) 5,543 (635) 295 5,203
Total assets 94,537 7,967 $(31,354) $71,150
Nine months ended June 30, 1999
Net sales $31,722 $11,644 $ (3,430) $39,936
Operating income (loss) 6,191 151 286 6,628
Income tax provision (benefit) 2,363 (286) (15) 2,062
Net earnings (loss) 2,717 (198) 387 2,906
Total assets 84,253 15,731 $(29,567) $70,417
(1) Eliminations consist of intersegment transactions.
Transactions between geographic segments are accounted for as intercompany
sales at established intercompany prices for internal and management
purposes with all intercompany amounts eliminated in consolidation. The MDI
segment data for total assets includes corporate goodwill and intangibles
of $22,418,000, and $24,349,000 as of June 30, 2000 and September 30, 1999,
respectively.
9. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement established accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at
it fair value. The Company is required to adopt this statement in fiscal
year 2001. The Company does not currently hold nor invest in any type of
derivative instruments.
15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Restatement of Fiscal Period 1999 Financial Statements
The fiscal period 1999 financial statements included herein, and the comparative
discussion that follows, have been restated to reflect the correction of a
bookkeeping error which occurred in June 1999 related to sales to the Company's
German subsidiary. The impact of this restatement to earnings for the
three-month and nine-month periods ended June 30, 1999 is discussed in Note 1 to
the interim financial statements included herein.
Results of Operations - Third Quarter Fiscal 2000
Compared to Third Quarter Fiscal 1999, As Restated
Net Sales
Net sales increased $778,000 or 6%, to $14,340,000 for the third quarter of
fiscal 2000 compared to fiscal 1999. This increase was comprised of volume
growth of 8% or $1,049,000, an aggregate favorable price increase of 2% or
$230,000, and currency losses of (4%) or $(501,000). Adjusted for currency
losses, fiscal 2000 third quarter net sales increased 9%.
Volume growth in core product sales for the quarter resulted primarily from
increases in the Rotavirus, H Pylori, virology and microbiology product lines,
offset by slight decreases in certain other product lines. The Company's
proficiency testing and reagent sales also contributed to volume growth for the
third quarter of fiscal 2000.
International sales were $4,697,000 or 33% of total net sales for the quarter
compared to $4,294,000 or 32% of total net sales in fiscal 1999. Domestic
exports were $818,000 for the quarter, compared to $798,000 in fiscal 1999,
while the remaining international sales were generated by MDE. Although MDE's
sales for the third quarter of fiscal 2000 include the unfavorable impact of
currency losses discussed above, MDE experienced strong volume growth resulting
in an overall 11% increase in sales over the prior year third quarter.
Gross Profit
Gross profit increased $379,000 or 4%, to $9,140,000 for the third quarter of
fiscal 2000 compared to fiscal 1999. Gross profit margins declined to 64% for
the third quarter of fiscal 2000 compared to 65% in fiscal 1999. Margins have
been unfavorably impacted by the strengthening of the dollar in Europe (currency
losses), product mix, as well as higher scrap costs. The Company's manufacturing
and distribution costs are predominantly incurred in US dollars whereas a
significant portion of international sales are denominated in foreign
currencies. Consequently, a significant portion of the currency losses discussed
under "Net Sales" above, adversely affected gross profit margins.
The Company is seeing lower costs on the Gull products now being manufactured in
Cincinnati; however, the favorable impact on gross profit margins has been
tempered by the effects of currency and sales mix. Absent these factors,
management believes that the lower manufacturing costs will result in
improvements in gross profit margins over the next several months.
16
Operating Expenses
Operating expenses, inclusive of merger integration costs in fiscal 1999,
decreased $564,000 or 9%, to $5,764,000 during the third quarter of fiscal 2000
compared to fiscal 1999. Excluding merger integration costs in fiscal 1999,
operating expenses were 40% of sales during the third quarter of fiscal 2000
compared to 42% in fiscal 1999. The overall decrease in operating expenses as a
percentage of sales is attributable to a higher sales base in fiscal 2000, among
other factors discussed below. Overall, operating expenses were favorably
impacted by currency.
Research and development expenses decreased $124,000 or 20%, during the third
quarter of fiscal 2000, and as a percentage of sales, decreased to 4% from 5% in
fiscal 1999. The decrease in research and development expenses is primarily due
to corporate cost-savings efforts.
Sales and marketing expenses increased $117,000 or 4% during the third quarter
of fiscal 2000, and as a percentage of sales, decreased to 20% from 21% in
fiscal 1999. The increase in sales and marketing expenses is primarily due to
higher advertising costs as well as consulting fees for business development in
Asia.
General and administrative expenses increased $73,000 or 3% during the third
quarter of fiscal 2000, and as a percentage of sales, decreased to 16% from 17%
in fiscal 1999. General and administrative expenses were unfavorably impacted by
higher amortization costs associated with intangibles from the Gull acquisition
based on final appraisals, as well as normal personnel cost increases. However,
such increases were somewhat offset by the elimination of certain administrative
costs in Salt Lake City upon closure of that facility in January 2000 and other
corporate cost-saving efforts.
Operating Income
As a result of the above items, operating income, inclusive of merger
integration costs in fiscal 1999, increased $943,000 or 39%, to $3,376,000
during the third quarter of fiscal 2000 compared to fiscal 1999.
Other Income and Expense
During the third quarter of fiscal 2000, the Company completed the sale of the
former Gull headquarters and production facility in Salt Lake City, realizing a
net gain of $292,000. See Note 2 to the interim financial statements included
herein for further information.
Income Taxes
The provision for income taxes is at an effective rate of 39% for the third
quarter of fiscal 2000 compared to 40% for fiscal 1999. The decrease in the
effective tax rate during the third quarter of fiscal 2000 reflects favorable
adjustments to tax rates in certain states and localities in the US.
The Company has continued to record deferred tax assets for a portion of net
operating loss benefits in European operations based on tax-planning strategies.
The realization of deferred tax assets related to net operating loss benefits
for European operations is dependent upon generation of sufficient future
taxable income from the successful execution of these tax-planning strategies.
Management believes that it is more likely than not, after consideration of the
valuation allowance that has been established, that the net amount of deferred
tax assets related to net operating loss benefits for European operations will
be realized. However, the amount of net deferred tax assets related to net
operating loss benefits for European operations could be reduced in future
periods if the execution of tax-planning strategies is not as successful as
planned.
17
In addition, successful execution of these tax-planning strategies will result
in a higher effective tax rate being reported in fiscal 2001 in certain European
tax jurisdictions. However, because of the availability of net operating loss
carryforwards in these jurisdictions, there will be little impact on cash flows
to the Company.
Results of Operations - Nine Months ended June 30, 2000
Compared to Nine Months Ended June 30, 1999, As Restated
Net Sales
Net sales increased $3,310,000 or 8%, to $43,246,000 for the first nine months
of fiscal 2000 compared to fiscal 1999. This increase was comprised of volume
growth of 11% or $4,583,000, an aggregate price increase of 1% or $284,000, and
currency losses of (4%) or $(1,557,000). Adjusted for currency losses, net sales
for the first nine months of fiscal 2000 increased 12%.
Volume growth in core product sales for the first nine months of fiscal 2000
resulted primarily from increases in the Rotavirus, H Pylori, virology and
microbiology product lines, which reflect sales increases of 31%, 54%, 27% and
114%, respectively, compared to fiscal 1999. Such sales increases have been
complemented by smaller sales increases in certain other product lines and have
also been offset by slight sales decreases in certain other product lines. The
Company's proficiency testing and reagent sales also contributed to volume
growth for the first nine months of fiscal 2000.
International sales were $13,521,000 or 31% of total net sales for the first
nine months of fiscal 2000 compared to $13,789,000 or 34% of total net sales in
fiscal 1999. Domestic exports were $2,358,000 for the first nine months of
fiscal 2000, compared to $2,145,000 in fiscal 1999, while the remaining
international sales were generated by MDE. MDE's sales for the first nine months
of fiscal 2000 include the unfavorable impact of currency losses and the effect
of the regulatory environment in Germany that began in July 1999. Such
regulatory changes, which were designed to reduce healthcare costs and have
resulted in significant reductions in diagnostic tests ordered by physicians,
have been challenged since their inception by both the healthcare industry and
the patient population.
Gross Profit
Gross profit increased $1,761,000 or 7%, to $27,230,000 for the first nine
months of fiscal 2000 compared to fiscal 1999. Gross profit margins declined to
63% for the first nine months of fiscal 2000 compared to 64% in fiscal 1999.
Similar to the third quarter discussion above, margins have been unfavorably
impacted by the strengthening of the dollar in Europe (currency losses), product
mix, as well as higher scrap costs. The Company's manufacturing and distribution
costs are predominantly incurred in US dollars whereas a significant portion of
international sales are denominated in foreign currencies. Consequently, a
significant portion of the currency losses discussed under "Net Sales" above,
adversely affected gross profit margins.
As stated above, the Company is seeing lower costs on the Gull products now
being manufactured in Cincinnati; however, the favorable impact on gross profit
margins has been tempered by the effects of currency and sales mix. Absent these
factors, management believes that the lower manufacturing costs will result in
improvements in gross profit margins over the next several months.
18
Operating Expenses
Operating expenses, inclusive of merger integration costs in fiscal 1999,
decreased $1,089,000 or 6%, to $17,752,000 during the first nine months of
fiscal 2000 compared to fiscal 1999. Excluding merger integration costs in
fiscal 1999, operating expenses increased $753,000 or 4%, during the first nine
months of fiscal 2000 compared to fiscal 1999, and as a percentage of sales,
decreased to 41% from 43% in fiscal 1999. Overall, exclusive of merger
integration costs in fiscal 1999, operating expenses increased as they reflect
nine months of Gull activity in fiscal 2000 and only eight months in fiscal
1999. Other factors leading to the increase in operating expenses are discussed
below. Operating expenses have also been favorably impacted by currency.
Research and development expenses decreased $146,000 or 9% during the first nine
months of fiscal 2000, and as a percentage of sales, decreased to 3% from 4% in
fiscal 1999. The decrease reflects the consolidation of research and development
activities in the Cincinnati facility in March 1999 and other corporate
cost-saving efforts.
Sales and marketing expenses increased $473,000 or 6% during the first nine
months of fiscal 2000 compared to fiscal 1999, reflecting one additional month
of Gull operations in fiscal 2000 as well as normal personnel cost increases. As
a percentage of sales, sales and marketing expenses were flat at 21% of sales
during the first nine months of fiscal 2000 compared to fiscal 1999.
General and administrative expenses increased $426,000 or 6% during the first
nine months of fiscal 2000 compared to fiscal 1999, reflecting one additional
month of Gull operations during fiscal 2000 and include higher amortization
costs associated with intangibles from the Gull acquisition based on final
appraisals, as well as normal personnel cost increases. However, such increases
were somewhat offset by the elimination of certain administrative costs in Salt
Lake City upon closure of that facility and other corporate cost-saving efforts.
As a percentage of sales, general and administrative expenses were flat at 17%
of sales during the first nine months of fiscal 2000 compared to fiscal 1999.
Operating Income
As a result of the above items, operating income, inclusive of merger
integration costs in fiscal 1999, increased $2,850,000 or 43%, to $9,478,000
during the first nine months of fiscal 2000 compared to fiscal 1999. Exclusive
of merger integration costs in fiscal 1999, operating income increased
$1,008,000 or 12%.
Other Income and Expense
Interest expense decreased $294,000 or 16%, to $1,543,000 during the first nine
months of fiscal 2000 compared to fiscal 1999. This decrease resulted primarily
from the refinancing of debt assumed in the Gull acquisition during January
1999.
During the third quarter of fiscal 2000, the Company completed the sale of the
former Gull headquarters and production facility in Salt Lake City, realizing a
net gain of $292,000. See Note 2 to the interim financial statements included
herein for further information.
Income Taxes
The provision for income taxes is at an effective rate of 39% for the first nine
months of fiscal 2000 compared to 42% for fiscal 1999. The decrease in the
effective tax rate reflects favorable adjustments to tax rates in certain states
and localities in the US, as well as the tax effects of the final allocation of
the purchase price for the Gull acquisition and the resulting amount of
non-deductible goodwill.
19
Liquidity and Capital Resources
The Company's operating cash flow and potential financing requirements are
determined by analysis of annual operating and capital spending budgets and
consideration of acquisition plans. The Company has historically maintained a
significant level of cash and cash equivalents and credit line availability in
order to quickly respond to acquisition opportunities.
During the first nine months of fiscal 2000, net cash flows provided by
operations were $4,481,000, compared to $7,277,000 in fiscal 1999. Net cash
flows provided by operations in fiscal 2000 were favorably impacted by higher
net income and non-cash expenses for depreciation and amortization, reflecting a
full nine months of Gull operations compared to only eight months in fiscal
1999. Net cash flows from operations in fiscal 2000 were negatively impacted by
growth in accounts receivable, inventories and prepaids, and decreases in
accounts payable and accrued expenses. These changes in current assets and
liabilities reflect overall growth in the business. Net cash flows from
operations in fiscal 2000 were also negatively impacted by currency translation
because of the strengthening of the dollar in Europe.
During the first nine months of fiscal 2000, net cash flows used in investing
activities were $1,018,000, in fiscal 2000 compared to $18,310,000 in fiscal
1999. Net cash flows used in investing activities in fiscal 2000 primarily
relate to capital expenditures for the Cincinnati production facility to
accommodate the Gull product lines somewhat offset by cash received in the sale
of the Salt Lake City property. Net cash flows used in investing activities
during fiscal 1999 include $18,440,000 related to the acquisition of Gull.
During the first nine months of fiscal 2000, net cash flows used in financing
activities were $4,434,000 compared to $3,178,000 in fiscal 1999. This change is
largely due to principal payments on debt related to renovation of the
Cincinnati production facility and a higher dividend rate. In December 1999, the
Company financed the renovation of the Cincinnati production facility through a
$3,478,000 five-year term loan bearing interest at 8% and a $522,000 seven-year
capital lease.
Net cash flows from operations are anticipated to fund working capital
requirements for the balance of fiscal 2000. The Company has a $20,000,000
credit facility with a commercial bank under which $16,718,000 is available at
June 30, 2000. Also, the Company has cash, cash equivalents and investments in
the aggregate amount of $5,986,000 at June 30, 2000.
Impact of Conversion to the Euro
Prior to December 31, 1999, the Company implemented plans to make ready all
critical information technology systems, including hardware and software, and
non-information technology systems, such as computer chips embedded in
communication, security, manufacturing, laboratory and instrumentation
equipment. As of the date of this filing, the Company has had no significant
interruptions to its business as a result of the Year 2000 date change. The
Company plans to monitor its information technology systems and non-information
technology systems throughout fiscal 2000 to identify and address any issues
related to the Year 2000 date change.
The Company is in the process of assessing the impact of the conversion to the
Euro on its systems and business operations. The Company's primary business
locations in Europe are currently able to process Euro transactions. The Company
does not believe this conversion will have a material impact on the business and
operations, however, there can be no assurances that this will be the case.
20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On April 6, 2000, Meridian Diagnostics, Inc. announced a recently published
study has determined that individuals infected with genital herpes, usually HSV
Type 2, can spread the virus to others even when symptoms are not present. This
research, published in the New England Journal of Medicine and conducted by Dr.
Anna Wald, medical director of the University of Washington's Virology Research
Clinic, indicated that infected individuals can spread this virus unknowingly to
their partners. Wald tested a number of individuals and found they had the virus
present at the same rate on days when they exhibited no symptoms, which was on
average one day each month. The research also discovered that men were
potentially infectious at the same rate as women when they were asymptomatic
suggesting that men can spread the infection as well.
Meridian Diagnostics offers its new Premier(TM) Type-Specific HSV-1 IgG ELISA
Test (oral herpes) and Premier(TM) Type-Specific HSV-2 IgG ELISA Test (genital
herpes) which accurately distinguish Herpes Simplex Virus (HSV) Type 1 from Type
2 herpes infections. The Western Blot Test was originally the only test that
could differentiate between HSV-1 and HSV-2, yet it was very expensive and
seldom used.
21
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit No. Description Page(s)
------------ -------------------------- -------
27 Financial Data Schedule 23-25
99 Forward Looking Statements 26
(a) Reports on Form 8-K:
None.
22
Signature:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there-unto duly authorized.
MERIDIAN DIAGNOSTICS, INC.
AND SUBSIDIARIES
Date: August 17, 2000 /S/ MELISSA LUEKE
--------------------------------
Melissa Lueke,
Corporate Controller
(Acting Principal Accounting Officer)