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 December 31, 1995 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 31-0888197 laws of Ohio ______________________ ___________________________________ (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 at January 31, 1996 _________________________ _______________________________ Common stock, no par value 14,245,364 MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES INDEX TO QUARTERLY REPORT ON FORM 10-Q Page(s) _______ PART I. FINANCIAL INFORMATION Item 1. Financial Statements- Consolidated Balance Sheets - December 31, 1995 and September 30, 1995 3-4 Consolidated Statements of Earnings - Three Months Ended December 31, 1995 and 1994 5 Consolidated Statements of Cash Flows - Three Months Ended December 31, 1995 and 1994 6 Notes to Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 5. Other Information 11-12 Item 6. Exhibits and Reports on Form 8-K 13 Signature 13 Exhibit 11 Computation of Earnings per Common Share 14 Exhibit 27 Financial Data Schedule 15-17 MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) ASSETS ______ December 31, September 30, 1995 1995 ______________ _____________ CURRENT ASSETS: Cash and short-term investments $10,597,277 $ 8,918,637 Accounts receivable, less allowance of $166,693 and $164,136 for doubtful accounts 5,326,195 6,482,999 Inventories 3,330,454 3,032,655 Prepaid expenses and other 494,898 321,775 Deferred tax assets 332,463 324,910 ____________ ___________ Total current assets 20,081,287 19,080,976 ____________ ___________ PROPERTY, PLANT AND EQUIPMENT: Land 271,760 269,217 Building improvements 5,910,989 6,162,668 Machinery, equipment and furniture 5,608,034 5,525,455 Construction in progress 13,428 - ____________ ___________ 11,804,211 11,957,340 Less- Accumulated depreciation and amortization 4,766,519 4,816,905 ____________ ___________ Net property, plant and equipment 7,037,692 7,140,435 ____________ ___________ OTHER ASSETS: Long-term receivable 20,272 12,670 Deferred royalties 68,321 74,762 Deferred tax assets 132,879 87,879 Deferred debenture offering costs, net of accumulated amortization of $133,357 - 395,731 Covenants not to compete, net of accumulated amortization of $1,950,306 and $1,827,718 2,310,288 2,432,876 License agreements, net of accumulated amortization of $786,822 and $772,433 348,291 362,680 Patents, tradenames, customer lists and distributorships, net of accumulated amortization of $527,861 and $475,762 1,785,139 1,837,238 Other intangible assets, net of accumulated amortization of $96,086 and $85,570 534,914 545,430 Costs in excess of net assets acquired, net of accumulated amortization of $509,556 and $458,482 2,547,437 2,598,511 ____________ ___________ Total other assets 7,747,541 8,347,777 ____________ ___________ Total assets $34,866,520 $34,569,188 ____________ ___________ ____________ ___________ MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY ____________________________________ December 31, September 30, 1995 1995 ____________ _____________ CURRENT LIABILITIES: Current portion of long-term obligations $ 394,104 $ 381,932 Current portion of capital lease obligation 110,259 63,561 Accounts payable 1,036,894 689,869 Accrued payroll and payroll taxes 438,151 723,946 Other accrued expenses 855,028 937,348 Income taxes payable 1,162,189 458,707 ____________ ___________ Total current liabilities 3,996,625 3,255,363 ____________ ___________ LONG-TERM OBLIGATIONS 4,248,052 12,285,668 ____________ ___________ CAPITAL LEASE OBLIGATIONS 415,380 149,925 ____________ ___________ SHAREHOLDERS' EQUITY: Preferred stock, no par value, 1,000,000 shares authorized; none issued Common stock, no par value, 25,000,000 shares authorized; 14,244,937 and 12,924,814 shares issued and outstanding, respectively stated at 2,371,960 1,487,159 Additional paid-in capital 20,429,588 13,895,901 Retained earnings 3,644,116 3,747,930 Foreign currency translation adjustment (239,201) (252,758) ____________ ___________ Total shareholders' equity 26,206,463 18,878,232 ____________ ___________ Total liabilities and shareholders' equity $34,866,520 $34,569,188 ____________ ___________ ____________ ___________ MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES Consolidated Statements of Earnings (Unaudited) Three Months Ended December 31, _______________________________ 1995 1994 _____________ ____________ NET SALES $ 5,521,529 $ 5,105,692 COST OF SALES 1,747,499 1,708,465 ____________ ___________ Gross Profit 3,774,030 3,397,227 ____________ ___________ OPERATING EXPENSES: Research and development 340,387 357,005 Selling and marketing 1,363,321 1,175,237 General and administrative 1,018,740 989,493 ____________ ___________ Total operating expenses 2,722,448 2,521,735 ____________ ___________ Operating income 1,051,582 875,492 ____________ ___________ OTHER INCOME (EXPENSE): Licensing and related fees 15,900 36,108 Interest income 127,083 82,709 Interest expense (146,667) (262,614) Currency gains (losses) 22,288 3,882 Other, net (7,440) (3,147) ____________ ___________ Total other income (expense) 11,164 (143,062) ____________ ___________ Earnings before income taxes 1,062,746 732,430 INCOME TAXES 433,585 302,000 ____________ ___________ Net earnings $629,161 $430,430 ____________ ___________ ____________ ___________ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 13,897,766 12,293,040 ____________ ___________ ____________ ___________ EARNINGS PER COMMON SHARE $ .05 $ .04 ____________ ___________ ____________ ___________ MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Three Months Ended December 31, ____________________________ 1995 1994 ____________ ___________ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings 629,161 430,430 Noncash items- Disposal of fixed asset 1,690 - Amortization of royalties 6,441 - Depreciation of property, plant and equipment 254,964 191,525 Amortization of intangible assets 266,550 272,955 Deferred interest expense 39,294 38,738 Deferred income taxes (52,553) (105,230) Long term receivables (7,602) - Changes in other current assets and current liabilities- Accounts receivable, net 1,156,804 (272,282) Inventories (297,799) (202,442) Prepaid expenses and other (173,123) (105,289) Accounts payable 347,025 (1,173,507) Accrued expenses (368,115) 483,709 Income taxes payable 703,482 (190,658) ____________ ___________ Net cash provided by (used for) operating activities 2,506,219 (632,051) ____________ ___________ CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment acquired, net (153,911) (412,309) ____________ ___________ Net cash used for investing activities (153,911) (412,309) ____________ ___________ CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term obligations (225,123) (67,578) Proceeds from long-term obligations 339,538 282,458 Dividends paid (732,975) (238,697) Proceeds from issuance of common stock, net (68,665) (1,066) Effect of exchange rate changes on cash 13,557 (6,909) ____________ ___________ Net cash provided by (used for) financing activities (673,668) (31,792) ____________ ___________ NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 1,678,640 (1,076,152) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 8,918,637 8,831,983 ____________ ___________ CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $10,597,277 $ 7,755,831 ____________ ___________ ____________ ___________ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for- Income taxes $ 14,500 $ 513,950 ____________ ___________ ____________ ___________ Interest $ 46,550 $ 14,364 ____________ ___________ ____________ ___________ Non-cash activities- Common stock issued from conversion of subordinated debentures, net of amortization of deferred debenture offering cost of $379,847. $ 7,487,153 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 disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the requirements of the Securities and Exchange Commission, although 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 consolidated financial statements and notes thereto included in the Company's latest annual report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year. (2) Inventories ___________ Inventories are comprised of the following: December 31, September 30, 1995 1995 ____________ _____________ Raw materials $ 1,493,610 $ 1,165,319 Work-in-process 715,926 626,077 Finished goods 1,120,918 1,241,259 ______________ ______________ $ 3,330,454 $ 3,032,655 ______________ ______________ ______________ ______________ (3) Income Taxes ____________ The provisions for income taxes were computed at the estimated annualized effective tax rates utilizing current tax law in effect, after giving effect to research and experimentation credits. (4) Earnings Per Common Share _________________________ Net earnings per share has been computed based upon the weighted average number of shares outstanding during the periods. No material dilution results from outstanding stock options, the only common stock equivalents, nor from the conversion of the subordinated debentures. All share and per share information have been adjusted to reflect the conversion of subordinated debentures into common stock as well as the 3 for 2 stock split in October 1995. Additionally all share and per share information have been adjusted for a 3% stock dividend in November 1994. (5) Translation of Foreign Currency _______________________________ Assets and liabilities of foreign operations are translated using quarter end exchange rates, and revenues and expenses are translated using exchange rates prevailing during the year with gains or losses resulting from translation included in a separate component of shareholders' equity. Gains and losses resulting from transactions in foreign currencies were immaterial. Item 2. Management's Discussion and Analysis Of Financial Condition and Results of Operations Results of Operations _____________________ Net sales increased $416,000, or 8%, to $5,522,000 for the first fiscal quarter compared to the prior year. This increase is attributable to the strong unit growth in the ImmunoCardR product line (primarily H. pylori, mononucleosis and mycoplasma), up 34%; growth in the ParaPakR line (ParaPak Ultra and Plus), up 8%; Premier line (Toxin A, EHEC and Giardia), up 6%. The increase in sales of $416,000 was comprised of volume of $294,000, or 6%, pricing of $129,000, or 2%, offset by currency of $7,000. European sales for the quarter increased $255,000, or 26%. The increase was attributable to continued strong unit growth in the Premier line, up 55% including EHEC sales of $49,000 (introduced in February 1995), ParaPak, up 26% and the Inova line of products, introduced in May, 1995, which contributed $42,000. This increase of $255,000 is comprised of volume of $215,000, or 22%, price of $47,000, or 5%, offset by currency of $7,000, or 1%. Gross profit increased 11% compared to the sales increase of 8% and improved as a percentage of net sales to 68.4% for the first fiscal quarter compared to 66.5% for the three-month period ended December 31, 1995. Product mix, driven by increases in the ParaPak and ImmunoCard lines, up 8% and 34% respectively, coupled with increases in average selling prices and the continuing impact of manufacturing and warehousing efficiencies were the principal factors accounting for the improvement in gross profit. Total operating expenses increased $201,000, or 8%, for the first fiscal quarter versus the three months ended December 31, 1994. Total operating expenses were 49.3% of net sales for the quarter, essentially the same as the prior year. Research and development expenses for the first fiscal quarter were down $17,000, or 4.7%, from the prior year stemming from the timing of clinical studies. Selling and marketing expenses increased 16% as a result of stepped-up promotional/advertising expenditures in the U.S. associated with new products, Premier Cryptosporidium, Premier E. coli 0157, Premier HSV Plus and ParaPak, including ParaPak ECOFIX. In addition, in Europe, higher personnel costs, meeting expenses and outside services accounted for the majority of the remainder of the increase. General and administrative expenses increased 3% for the first quarter, primarily from higher personnel costs in Europe. Operating income as a result of the above increased $176,000, or 20%, for the first fiscal quarter and improved 2 points as a percent of sales. Other income/(expense) increased $154,000 for the quarter. This improvement is primarily from a reduction in interest expense of $116,000 as a result of the conversion of the convertible debentures as of November 30, 1995. The increase in interest income reflects the increased amount of assets invested during the period. Gains/losses in foreign exchange were not material during the periods. The cumulative foreign currency translation adjustment changed by $13,000 during the quarter as a result of the U.S. dollar softening against the Lira during the period. The Company's effective tax rate remained at 41% for the quarter compared to the prior year. Liquidity and Capital Resources _______________________________ At December 31, 1995, the Company had cash and short-term investments of $10,597,000 and working capital of $16,085,000. Trade accounts receivable decreased $1,157,000, or 18%, while inventories increased $298,000, or 10% compared to September 30, 1995. Receivables decreased in the U.S. and Europe, however the majority of the decline is in the U.S. from special dating offers from the previous quarter which were remitted. The change in inventories reflects higher stock levels associated with projected sales. Cash flow from operations is expected to continue to fund working capital requirements for the foreseeable future. Currently, the Company has available $6 million in a line of credit with a commercial bank. Recently Issued Accounting Standards ____________________________________ In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121 (Statement 121) on accounting for the impairment of long-lived assets to be held and used. Statement 121 also establishes accounting standards for long-lived assets that are to be disposed. Statement 121 is required to be applied prospectively for assets to be held and used. The initial application of Statement 121 to assets held for disposal is required to be reported as the cumulative effect of a change in accounting principle. The Company is required to adopt Statement 121 no later than fiscal 1997. The Company has not yet determined when it will adopt Statement 121 and the impact, if any, that the adoption will have on its financial position or results of operations. In October 1995, the FASB issued Statement No. 123 (Statement 123) establishing financial accounting and reporting standards for stock-based employee compensation plans. Statement 123 encourages the use of the fair value based method to measure compensation cost for stock-based employee compensation plans, however, it also continues to allow the intrinsic value based method of accounting as prescribed by APB Opinion NO. 25, which is currently used by the Company. If the intrinsic value based method continues to be used, Statement 123 requires pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting had been applied. The fair value based method requires that compensation cost be measured at the grant date based upon the value of the award and recognized over the service period, which is normally the vesting period. The Company is required to adopt Statement 123 no later than fiscal 1997. The Company has not yet determined when it will adopt Statement 123 or the valuation method it will use. PART II. OTHER INFORMATION Item 1. Legal Proceedings In June 1995, Meridian and Inova Diagnostics, Inc. were sued by Delta Biologicals srl in the 11th Judicial circuit for Dade County, Florida. The action relates to a February 1995 agreement between Meridian's European subsidiary, Meridian Diagnostics Europe, srl, and Inova for the marketing and distribution of a line of autoimmune disease tests manufactured by Inova. The plaintiff alleges that the agreement violates its distribution agreement with Inova and seeks unspecified damages from Inova and Meridian. In the February 1995 agreement, Inova represented to Meridian that Inova had the right to enter into the agreement with Meridian without violating the rights of any other third party, and that Inova would indemnify and hold harmless Meridian for all costs, damages and expenses arising from any such claims. Item 5. Other Information On October 5, 1995, the Company announced the introduction of Para-Pak ECOFIX and Para-Pak ULTRA ECOFIX, a formalin-free, mercury-free one-vial system for routine collection, transportation, preservation and examination of stool specimens for intestinal parasite. Para-Pak ECOFIX contains no formalin or mercury and eliminates the need of formaldehyde monitoring for OSHA, eliminates the need to process specimens in a biological safety hood and reduces the cost of outside disposal. Para-Pak ULTRA ECOFIX offers a completely closed system which reduces exposure to the specimen and provides for safe laboratory handling. The one-vial system is designed for transportation and filtration from a single vial and reduces the technician processing time required per specimen. On November 20, 1995, the Company received clearance for a new indication from the FDA for its Premier EHECtm (Enterohemorrhagic E. coli) product permitting laboratories to use the product to detect E. coli toxins directly from stool specimens. The Meridian Premier EHEC test is the only FDA cleared direct stool detection product currently available. Prior to this technology becoming available, it had been necessary to culture the E. coli organism from the stools of infected patients, which required twenty-four hours. Meridian's new product will permit laboratories to test stools directly for the presence of the E. coli toxins thereby eliminating one full day in the testing process. E. coli bacteria can produce toxins which cause Hemorrhagic Colitis, which is characterized by bloody diarrhea and severe abdominal cramps. The disease is most serious in children and elderly. Children are also at high risk of developing hemolytic uremic syndrome (HUS) which is the leading cause of acute renal failure leading to death. E. coli from poorly cooked meats and other contaminated foods continues to cause serious disease, especially in children. On November 20, 1995 Premier E. coli 0157 was introduced. This product, which is licensed and manufactured for Meridian Diagnostics, Inc., is a rapid screening test for the presumptive determination of the presence of E. coli 0157 in stool specimens. E. coli 0157 is the most common EHEC serotype to cause human disease and the serotype that has been identified in food borne outbreaks of hemorrhagic colitis associated with poorly cooked beef. Unlike other serotypes which are detected by Premier EHEC, the diagnosis of E. coli serotype 0157 is a reportable disease in approximately 35 states, and the Council of State and Territorial Epidemiologists has recommended that it be a nationally reportable disease. Premier Cryptosporidium, which is licensed and manufactured for Meridian Diagnostics, Inc., was introduced on November 20, 1995. Premier Cryptosporidium is a rapid enzyme immunoassay for the detection of Cryptosporidium oocyst in stool. Cryptosporidium is a parasite that has only recently been recognized as an important enteric pathogen. The organism causes a mild to severe self- limiting diarrhea in immunocompetent individuals. However, the infection in immunocompromised (e.g. AIDS) patients is much more severe and may be life threatening. Pathways of transmission include animal to human, person to person, and water contamination. Traditional identification of Cryptosporidium has required trained technicians experienced in the microscopic examination of stools using chemical stains or fluorescent labeled antibodies. This technique is often time-consuming and is compromised by low proficiency. The Premier Cryptosporidium assay is easy to perform, does not rely on the observation of intact organisms, and multiple specimens can be assayed simultaneously. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits- Exhibit No. Description Page(s) ___________ ______________________________ _______ 11 Computation of earnings per common share 14 27 Financial Data Schedule 15-17 (b) Reports on Form 8-K - None 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. February 6, 1996 /S/ GERARD BLAIN Date: ____________________ _________________________________ GERARD BLAIN, Vice President, Chief Financial Officer (Principal financial officer)