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, 1997
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 at April 30, 1997
-------------------------- -----------------------------
Common stock, no par value 14,365,034
Page 1 of 14
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements-
Consolidated Balance Sheets -
March 31, 1997 and September 30, 1996 3-4
Consolidated Statements of Earnings -
Three Months Ended March 31, 1997 and 1996
Six Months Ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows -
Six Months Ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of
Security Holders 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
Page 2 of 14
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
ASSETS
March 31, September 30,
1997 1996
---------- ------------
CURRENT ASSETS:
Cash and cash equivalents $14,662,367 $ 5,648,225
Short-term investments 5,797,300 14,094,299
Accounts receivable, less allowance
of $116,000 and $128,000
for doubtful accounts 8,496,574 9,206,498
Inventories 5,173,825 4,251,531
Prepaid expenses and other 368,377 189,433
Deferred tax assets 371,718 402,125
---------- ----------
Total current assets 34,870,161 33,792,111
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land 264,303 277,691
Building improvements 7,049,259 5,864,008
Machinery, equipment and furniture 6,376,042 6,322,071
Construction in progress 187,198 1,061,002
---------- ----------
13,876,802 13,524,772
Less- Accumulated depreciation
and amortization 5,679,493 5,171,388
---------- ----------
Net property, plant and equipment 8,197,309 8,353,384
---------- ----------
OTHER ASSETS:
Long-term receivables and other 637,836 573,710
Deferred royalties 214,066 278,027
Deferred tax assets 164,103 109,503
Deferred debenture offering costs,
net of accumulated amortization
of $69,000 and $1,500 1,259,336 1,260,543
Covenants not to compete, net of
accumulated amortization
of $2,752,236 and $2,381,064 2,768,358 3,139,530
License agreements, net of
accumulated amortization
of $858,765 and $829,987 276,348 305,125
Patents, tradenames, customer lists
and distributorships, net of
accumulated amortization of
$953,556 and $707,474 3,204,638 3,417,517
Other intangible assets, net of
accumulated amortization of
$229,169 and $154,469 2,011,831 2,086,531
Costs in excess of net assets acquired,
net of accumulated amortization
of $800,451 and $675,553 3,028,542 3,153,441
---------- ----------
Total other assets 13,565,058 14,323,927
---------- ----------
Total assets $56,632,528 $56,469,422
=========== ===========
Page 3 of 14
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, September 30,
1997 1996
--------- -------------
CURRENT LIABILITIES:
Current portion of long-term
obligations $ 383,000 $ 258,663
Current portion of capital
lease obligation 117,763 139,019
Accounts payable 714,813 990,249
Accrued payroll and payroll taxes 628,321 850,722
Other accrued expenses 1,247,007 1,065,417
Income taxes payable 1,054,729 831,723
---------- ---------
Total current liabilities 4,145,633 4,135,793
---------- ---------
LONG-TERM OBLIGATIONS 22,043,713 22,148,012
---------- ---------
CAPITAL LEASE OBLIGATIONS 570,422 617,619
---------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
1,000,000 shares
authorized; none issued - -
Common stock, no par value,
50,000,000 shares authorized;
14,364,993 and 14,278,578 shares
issued and outstanding, respectively,
stated at 2,393,696 2,386,153
Additional paid-in capital 20,570,159 20,526,337
Retained earnings 7,317,511 6,809,830
Cumulative foreign currency
translation adjustment (408,606) (154,322)
---------- ---------
Total shareholders' equity 29,872,760 29,567,998
---------- ---------
Total liabilities and
shareholders' equity $56,632,528 $56,469,422
=========== ===========
Page 4 of 14
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -------------------------
1997 1996 1997 1996
----------- ------------ ------------ -----------
NET SALES $8,336,712 $ 7,254,952 $15,898,505 $12,776,481
COST OF SALES 2,871,500 2,251,595 5,582,369 3,999,094
Gross Profit 5,465,212 5,003,357 10,316,136 8,777,387
OPERATING EXPENSES:
Research and development 395,728 356,252 794,238 696,639
Selling and marketing 1,805,605 1,451,465 3,600,181 2,814,787
General and administrative 1,195,183 977,440 2,246,014 1,996,180
Total operating expenses 3,396,516 2,785,157 6,640,433 5,507,606
Operating income 2,068,696 2,218,200 3,675,703 3,269,781
OTHER INCOME (EXPENSE):
Licensing and commission fees 7,297 17,038 7,297 32,938
Investment income 206,452 115,549 510,890 242,632
Interest expense and amortization
of debt expenses (390,857) (89,351) (881,157) (236,018)
Other, net 2,147 19,517 621 12,076
Currency gains/(losses) 10,642 1,343 6,848 23,631
Total other income (expense) (164,319) 64,096 (355,501) 75,259
Earnings before income taxes 1,904,377 2,282,296 3,320,202 3,345,040
INCOME TAXES 772,400 927,325 1,345,479 1,360,910
Net earnings $1,131,977 $1,354,971 $1,974,723 $1,984,130
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 14,356,731 14,248,041 14,318,274 14,071,922
EARNINGS PER COMMON SHARE $ .08 $ .10 $ .14 $ .14
Page 5 of 14
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
March 31,
-------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,974,723 $ 1,984,130
Noncash items-
Depreciation of property, plant
and equipment 558,747 495,255
Amortization of intangible assets
and deferred royalties 983,083 531,530
Deferred interest expense 83,292 82,097
Deferred income taxes (54,600) (174,695)
Change in current assets excluding cash
and short-term investments (360,907) (771,943)
Change in current liabilities, excluding
current portion of long term obligations (93,241) 887,967
Long term receivable and payable (59,571) (15,912)
Net cash provided by operating activities 3,031,526 3,018,429
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment acquired, net (402,673) (355,989)
Patents (39,194)
Sale of short-term investments 8,296,999 -
Royalty advanced - (37,500)
Net cash provided by (used for)
investing activities 7,855,132 (393,489)
CASH FLOWS FROM FINANCING ACTIVITIES:
Subordinated debentures offering costs (66,293) -
Proceeds from other long-term obligations - 395,576
Repayment of long-term obligations (136,262) (364,713)
Dividends paid (1,467,042) (1,231,564)
Proceeds from issuance of common stock, net 51,365 (63,103)
Net cash (used for) financing activities (1,618,232) (1,263,804)
Effect of exchange rate changes on cash (254,284) (35,297)
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,014,142 1,325,839
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,648,225 8,918,637
CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,662,367 $10,244,476
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Income taxes $ 1,058,500 $ 916,625
============ ===========
Interest $ 629,732 $ 78,515
============ ============
Non-cash activities-
Common stock issued from conversion of
subordinated debentures, net of
amortization of deferred debenture
offering cost of $379,847 and net
conversion cost of $77,649. $ - $ 7,409,504
============ ============
Page 6 of 14
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:
March 31, September 30,
1997 1996
----------- -------------
Raw materials $ 1,736,507 $ 1,223,438
Work-in-process 1,105,673 966,437
Finished goods 2,331,645 2,061,656
----------- -----------
$ 5,173,825 $ 4,251,531
=========== ===========
Page 7 of 14
(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 assumed conversion of the 7% Convertible
Subordinated Debentures issued September 27, 1996, due in 2006. These
debentures assuming their conversion, net of the pro forma after tax
interest expense, are anti-dilutive. All share and per share
information have been adjusted to reflect the conversion of the 7 1/4%
Convertible Subordinated Debentures due in 2001, called for redemption
on October 10, 1995 into common stock, as well as the 3 for 2 stock
split in October 1995.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 "Earnings Per Share" (Statement 128). This statement
requires the presentation of basic EPS and diluted EPS. Basic EPS is
computed by dividing income available to common stockholders 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 the dilutive potential common shares had been
issued. Using the methods prescribed in Statement 128, proforma basic
and diluted earnings per share would be as follows:
1997 1996
----------------- ----------------
Qtr. 6 mos. Qtr. 6 mos.
------- ------- ------- ------
Pro forma Basic EPS $ .08 $ .14 $ .10 $ .14
===== ===== ===== ====
Pro forma Diluted EPS $ .08 $ .13 $ .09 $ .14
===== ===== ===== ====
(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.
(6) Reclassifications-
Certain reclassifications have been made to the accompanying financial
statements to conform to the March 31, 1997 presentation.
Page 8 of 14
(7) 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 and for Long-lived Assets to be Disposed Of."
Statement 121 is required to be applied prospectively for assets to be
held and used. Statement 121 also establishes accounting standards for
long-lived assets that are to be disposed. 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 in 1997 and, based on
current circumstances, the effect of the adoption will not have a
material effect on its financial position or results of operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 (Statement 123) "Accounting for Stock Based
Compensation" 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 adopted Statement 123 in fiscal 1997
and will make the required footnote disclosures only. Therefore, the
adoption of this Statement will not have a material effect on the
Company's financial position or results of operations.
Item 2. Management's Discussion and Analysis Of Financial Condition
and Results of Operations
Results of Operations
Consolidated net sales increased $1,082,000, or 15%, to $8,337,000 for the
second fiscal quarter and increased $3,122,000, or 24%, to $15,899,000 for the
six months ended March 31, 1997. These increases were primarily from strong unit
volume growth in the Premier and ImmunoCard lines plus growth in OEM sales in
the U.S. and the Inova line of products sold in Italy. The Para-Pak,
mononucleosis and FiltraCheck product lines were down in the second quarter
partially offsetting the above gains. The increase in the Premier and ImmunoCard
formats was attributable to those products use for identification of C.
difficile, H. pylori, EHEC and Mycoplasma. The Cambridge product line, acquired
in June 1996, contributed over $800,000 of sales in the second quarter, or
approximately 74% of the total growth over the prior year fiscal quarter. The
Inova line of autoimmune products in Italy increased 25% for the quarter and 84%
for the six months period with year-to-date sales of $320,000.
The increase in consolidated net sales for the second fiscal quarter was
comprised of volume of $1,544,000, or 21%, offset by lower pricing of $399,000,
or 5%, and currency of $63,000, or 1%. Approximately one-fourth of the pricing
variance stems from European operations, similar in dollar amount to the first
fiscal quarter, reflecting the increasing pressure on health care cost
containment in the international markets. The remainder of the pricing change,
about $300,000, or 5%, relates largely to the relatively new exclusive national
contracts established in the U.S. with large hospital chains and reference
laboratories and was more than offset by unit volume increases which were up
about 26% in the U.S.
Page 9 of 14
Gross profit increased 9% for the quarter and 18% for the six-month period
compared to sales increases of 15% and 24% respectively. As a result, gross
profit declined as a percentage of sales to 65.6% compared to 69.0% for the
quarter; to 64.9% from 68.7% for the six months. The reduction in the gross
profit rate is largely related to the higher costs associated with the enteric
product line acquisition from Cambridge in June 1996. The acquisition included,
in addition to the amortization of certain acquisition costs, a one-year
inventory purchase agreement at a negotiated cost expected to be higher than the
Company's cost of manufacturing when the purchased product line is fully
integrated into the Company's manufacturing facilities in Cincinnati during the
third fiscal quarter of 1997. In addition, higher scrap and replacement costs
and higher depreciation and insurance costs related to expanded manufacturing
facilities were contributing factors to a lesser extent.
Total operating expenses increased $611,000, or 22%, for the second fiscal
quarter and $1,133,000 or 21%, for the six months ended March 31, 1997, compared
to the prior year. Total operating expenses were 40.7% of net sales for the
quarter, up 2.3 percentage points from the prior year, and were 41.8% of net
sales for the six months, down 1.3 percentage points.
Research and development expenses for the second fiscal quarter were up 11% and
up 14% for the six months. These increases are attributable to laboratory
supplies, consulting and other professional fees associated with EHEC
development for use in food, development of novel detection assays and testing
devices and expenses, namely international patent filings, associated with the
transition of Cytoclone from Cambridge.
Selling and marketing expenses increased 24% for the quarter and 28% for the six
months compared to the comparable prior year periods, primarily from U. S. sales
personnel added during fiscal 1996 to provide improved geographic coverage and
penetration of national accounts, higher national sales meeting expenses and
amortization of certain Cambridge acquisition costs. European selling and
marketing expenses were down approximately 10% for the periods excluding the
effect of currency.
General and administrative expenses increased 22% for the second fiscal quarter
and 13% for the six months. These increases are principally related to higher
personnel cost in the U.S., amortization of expenses associated with the
Cambridge acquisition, one-time expenses incurred this quarter for Meridian's
twentieth anniversary and outside professional fees for several special
projects. European expenses were relatively flat.
Operating income as a result of the above decreased $150,000, or 7%, and
declined about six percentage points as a percentage of sales for the second
fiscal quarter. For the six months, operating income increased $406,000, or 12%,
but declined two points as a percentage of sales.
Other expense increased by $228,000 and $431,000 respectively for the three and
six months periods ended March 31, 1997 which is more than accounted for by the
interest expense associated with the 7% Convertible Subordinated Debentures due
2006. Increases in interest income reflect the higher amount of invested cash
(from the debentures) during the periods. Gains/losses in foreign exchange were
not material during the periods. The cumulative foreign currency translation
adjustment changed by $267,000 during the quarter as a result of the U.S. dollar
significantly strengthening against the lira.
The Company's effective tax rate was essentially flat at 41% for both the
quarter and six months periods. Net earnings decreased 16% for the second fiscal
quarter to $1,132,000 from $1,355,000 and was relatively flat at $1,974,000
compared to $1,984,000 for the six months ended March 31, 1997, compared to the
prior year. The corresponding primary earnings per share for the comparable
periods were $0.08 and $0.10 for the quarters respectively, and $0.14 for both
six months periods.
Page 10 of 14
Liquidity and Capital Resources
Net cash flow provided by operations was $3,032,000 for the six month period
ended March 31, 1997, about equal to last year. However, accounts payable were
reduced during the quarter by approximately $1,700,000, in part from payment for
inventories acquired from Cambridge.
Net cash provided by investing activities increased $8,249,000 as a result of
the sale of short term investments with maturities greater than 90 days which
have been reinvested into maturities of less than 90 days and reflected in Cash
and Cash Equivalents of $14,662,000. Net cash used for financing activities
increased $354,000, or 28%, the major items being higher dividend payments
including the year-end special cash dividend of $0.025 per share plus expenses
associated with the issuance of the 7% debentures due in 2006.
Net cash flow from operations is expected to continue to fund working capital
requirements. Currently, the Company has an unused $10,000,000 line of credit
with a commercial bank and cash and short-term investments of $20,460,000.
Page 11 of 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The civil action filed by Delta Biologicals, s.r.l. ("Delta") against Inova
Diagnostics, Inc. ("Inova") and Meridian and Meridian's subsidiary, Meridian
Diagnostics s.r.l. ("MDE") in the Circuit Court of the Eleventh Judicial
Circuit, Dade County, Florida, Case No. 95-12955, in June 1995, and removed to
the United States District Court for the Southern District of Florida, Miami
Division, Case No. 95-1604-CIV, has been settled by all parties. The settlement
does not require Meridian or MDE to pay any sums to the settlement, and the
resolution of this matter has no material adverse effect on Meridian's financial
condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on January 23, 1997.
Each of the following matters was voted upon and approved by the Company's
shareholders as indicated below:
(1) Establishment of the number of directors to be elected at six,
13,383,839 votes for, 27,756 votes against, 33,113 abstentions.
(2) Election of the following directors:
(a) William J. Motto, 13,384,975 votes for and 59,733
abstentions
(b) Jerry Ruyan, 13,383,869 votes for and 60,839 abstentions
(c) James A. Buzard, 13,382,219 votes for and 62,489 abstentions
(d) Robert J. Ready, 13,384,075 votes for and 60,633 abstentions
(e) Gary P. Kreider, 13,384,025 votes for and 60,683
abstentions.
(f) John A. Kraeutler, 13,388,480 votes for and 56,228
abstentions.
(3) Ratification of the appointment of Arthur Andersen LLP as the
Company's independent public accountants for fiscal year 1997,
13,403,023 votes for, 23,001 votes against, 16,684 abstentions.
Item 5. Other Information - None
Page 12 of 14
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.
Date: April 30, 1997 /S/ GERARD BLAIN
----------------------------------------
GERARD BLAIN, Vice President,
Chief Financial Officer
(Principal Financial Officer)
Page 13 of 14