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, 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.
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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 January 29, 1998
- ------------------------------- --------------------------------
Common stock, no par value 14,371,932
Page 1 of 13
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, 1997 and September 30, 1997 3-4
Consolidated Statements of Earnings -
Three Months Ended December 31, 1997 and 1996 5
Consolidated Statements of Cash Flows -
Three Months Ended December 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 9-10
PART II. OTHER INFORMATION
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
Signature
Exhibit 11 Computation of Earnings per Common Share 13
Exhibit 27 Financial Data Schedule 14-16
Page 2 of 13
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
ASSETS
December 31, September 30,
1997 1997
----------- -------------
CURRENT ASSETS:
Cash and cash equivalents $11,053,773 $10,523,191
Investments 11,653,994 11,213,144
Accounts receivable, less allowance
of $197,628 and $166,742 for
doubtful accounts 10,872,791 10,622,759
Inventories 4,519,091 4,651,687
Prepaid expenses and other 251,912 458,732
Deferred tax assets 496,276 382,518
---------- ----------
Total current assets 38,847,837 37,852,031
========== ==========
PROPERTY, PLANT AND EQUIPMENT:
Land 256,816 259,993
Building improvements 6,616,820 6,629,847
Machinery, equipment and furniture 8,170,499 7,822,671
Construction in progress 128,832 96,218
---------- ----------
15,172,967 14,808,729
Less- Accumulated depreciation
and amortization 6,524,683 6,359,499
----------- -----------
Net property, plant and equipment 8,648,284 8,449,230
----------- -----------
OTHER ASSETS:
Long-term receivable and other 296,300 298,301
Deferred royalties 176,383 195,355
Deferred tax assets 672,842 645,542
Deferred debenture offering costs,
net of accumulated amortization of
$170,250 and $136,500 1,158,086 1,191,836
Covenants not to compete, net of
accumulated amortization
of $3,308,855 and $3,123,408 2,211,740 2,397,186
License agreements, net of
accumulated amortization
of $901,930 and $887,541 233,182 247,571
Patents, tradenames, customer lists
and distributorships, net of
accumulated amortization of
$1,277,512 and $1,204,686 2,882,358 2,954,764
Other intangible assets, net of
accumulated amortization of
$341,219 and $303,869 1,899,781 1,937,131
Costs in excess of net assets acquired,
net of accumulated amortization
of $449,992 and $422,880 1,294,831 1,321,943
----------- ------------
Total other assets 10,825,503 11,189,629
----------- ------------
Total assets $58,321,624 $57,490,890
=========== ===========
Page 3 of 13
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, September 30,
1997 1997
------------ -------------
CURRENT LIABILITIES:
Current portion of long-term
obligations $ 9 $ 73,877
Current portion of capital
lease obligations 205,701 106,516
Accounts payable 1,107,753 839,093
Accrued payroll and payroll taxes 728,584 841,603
Other accrued expenses 1,653,595 1,244,078
Income taxes payable 1,312,724 1,165,636
---------- -----------
Total current liabilities 5,008,366 4,270,803
---------- -----------
LONG-TERM OBLIGATIONS 20,026,322 20,023,880
---------- -----------
CAPITAL LEASE OBLIGATIONS 730,040 557,313
---------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
1,000,000 shares
authorized; none issued - -
Common stock, no par value,
50,000,000 shares authorized;
14,371,932 and 14,365,289 shares
issued and outstanding,
respectively stated at 2,394,321 2,393,852
Additional paid-in capital 20,576,852 20,571,453
Retained earnings 10,105,330 10,103,837
Cumulative foreign currency
translation adjustment (519,607) (430,248)
---------- -----------
Total shareholders' equity 32,556,896 32,638,894
---------- -----------
Total liabilities and
shareholders' equity $58,321,624 $57,490,890
=========== ===========
Page 4 of 13
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Three Months Ended
December 31,
--------------------------
1997 1996
---------- -----------
NET SALES $ 8,448,349 $ 7,561,793
COST OF SALES 2,925,297 2,710,869
----------- -----------
Gross profit 5,523,052 4,850,924
----------- -----------
OPERATING EXPENSES:
Research and development 556,150 398,510
Selling and marketing 1,812,969 1,794,576
General and administrative 1,341,997 1,050,831
----------- -----------
Total operating expenses 3,711,116 3,243,917
----------- -----------
Operating income 1,811,936 1,607,007
OTHER INCOME (EXPENSE):
Interest income 251,234 258,865
Interest expense (404,710) (444,727)
Currency gains (losses) 1,567 (3,794)
Other, net (16,239) (1,526)
----------- -----------
Total other (expense) (168,148) (191,182)
----------- -----------
Earnings before income taxes 1,643,788 1,415,825
INCOME TAXES 672,208 573,079
----------- -----------
Net earnings $ 971,580 $ 842,746
=========== ===========
BASIC WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 14,369,395 14,280,654
========== ==========
BASIC EARNINGS PER COMMON SHARE $ .07 $ .06
=========== ===========
DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 14,711,905 14,735,225
----------- -----------
DILUTED EARNINGS PER COMMON SHARE $ .07 $ .06
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Page 5 of 13
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
December 31,
-----------------------------
1997 1996
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 971,580 $ 842,746
Noncash items-
Depreciation of property, plant
and equipment 338,562 273,319
Amortization of intangible assets
and deferred royalties 389,425 498,101
Deferred interest expense 0 41,646
Deferred income taxes (141,058) 10,494
Change in current assets excluding
cash/cash equivalents and investments 89,384 513,047
Change in current liabilities, excluding
current portion of long term obligations 712,246 1,096,054
Long term receivable and payable 2,001 27,966
----------- -----------
Net cash provided by operating activities 2,362,140 3,303,373
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment acquired, net (434,141) (142,765)
Sale (purchase) of investments (440,850) 8,025,890
----------- -----------
Net cash provided by (used for)
investing activities (874,991) 7,883,125
CASH FLOWS FROM FINANCING ACTIVITIES:
Subordinated debentures offering costs 0 (66,293)
Proceeds from other long-term obligations 174,701 --
Repayment of long-term obligations (108,955) (60,769)
Dividends paid (970,087) (856,804)
Proceeds from issuance of common stock, net 5,868 25,359
----------- -----------
Net cash provided by (used for)
financing activities (898,473) (958,507)
----------- -----------
Effect of exchange rate changes on cash (58,094) 7,656
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 530,582 10,235,647
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 10,523,191 5,648,225
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 11,053,773 $ 15,883,872
============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for-
Income taxes $ 400,110 $ 119,050
Interest 65,694 18,247
============ ============
Page 6 of 13
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,
1997 1997
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Raw materials $1,325,653 $1,399,188
Work-in-process 1,408,507 1,652,270
Finished goods 1,784,931 1,600,229
$4,519,091 $4,651,687
(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.
Page 7 of 13
(4) Earnings Per Common Share-
--------------------------
Basic earnings per common share were computed by dividing net earnings by
the weighted average number of shares of common stock outstanding during
the quarter. Diluted earnings per common share were computed by dividing
net earnings by the sum of the weighted average number of shares of common
stock outstanding plus outstanding stock options, which are the only common
stock equivalent. The convertible subordinated debentures are
anti-dilutive. The Company adopted SFAS No. 128, "Earnings Per Share",
effective October 1, 1997. As a result, the Company's reported earnings per
share for the quarter ending December 31, 1996 were restated. The effect of
this change on previously reported earnings per share (EPS) data was as
follows:
Quarter Ending
Per Share Amounts 12/31/96
------------------------------ --------------
Primary EPS as reported $0.06
Effect of SFAS No. 128 -
-----
Basic EPS as restated $0.06
=====
Fully diluted EPS as reported n/a
Effect of SFAS No. 128 -
-----
Diluted EPS as restated $0.06
=====
(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 December 31, 1996 financial
statements to conform to the December 31, 1997 presentation.
(7) Recently Issued Accounting Standards
------------------------------------
During 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130 (Statement 130) on "Reporting Comprehensive Income".
Statement 130 is effective for the fiscal years beginning after December
15, 1997, or for Meridian's fiscal year ended September 30, 1999. The
objective of Statement 130 is to report a measure of all changes in the
equity of an enterprise that result from transactions and other economic
events of the period other than transactions with owners ("comprehensive
income"). Comprehensive income is the total of net income and all other
non-owner changes in equity. For the Company, this reporting will involve
gains and losses resulting from the translation of assets and liabilities
of foreign operations which are currently included in a separate component
of shareholders' equity. In addition, it will include unrealized gains and
losses on investments. Based on current circumstances, the effect of
Statement 130 will not have a material impact on the Company's financial
position or operating results.
Page 8 of 13
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
- ---------------------
Net sales increased $887,000, or 12%, to $8,448,000 for the first fiscal quarter
compared to the prior year. This increase is attributable to unit growth in the
H. pylori, C. difficile, ParaPakR and Mycoplasma lines which collectively
increased $877,000, or 21%. The Giardia and virology lines combined were down
about 17% versus the prior year while all other product lines in total increased
approximately 4%. Premier PlatinumR HpSA (H. pylori Specific Antigen), launched
in Europe in September 1997 and sold in the U.S. for research use only pending
Food and Drug Administration clearance, attained first quarter sales of about
$130,000.
The increase in sales of $887,000 was attributable to strong volume growth of
$1,383,000, or 18%, offset by pricing of ($306,000), or (4)%, and currency of
($109,000), or (2)%, respectively.
European sales decreased approximately $110,000 for the quarter due entirely to
the impact of currency from the stronger dollar versus the lira. Adjusted for
currency, European sales were up about 5% over the prior year. Premier Platinum
HpSA is growing rapidly in Europe, achieving about $90,000 in sales following
introduction in September 1997.
The impact of pricing for the quarter has softened somewhat from previous
quarters, however, reflects in part four new national contracts which became
effective after December 1996, and the addition of other products to previously
existing contracts. The balance of the pricing relates to competitive market
conditions, primarily in the U.S. and Europe.
Gross profit increased $672,000, or 14%, compared to the sales increase of 12%
and improved 1.2 points as a percentage of net sales to 65.4% for the first
fiscal quarter compared to 64.2% for the three months ended December 31, 1996.
The improvement reflects in part the higher margin on the Cambridge line of
enteric products which are now produced entirely in the Company's facility
versus the previously higher cost associated with the one year inventory
purchase agreement when the products were acquired in June 1996. Also
contributing to this improvement was the reduction in amortization of certain
acquisition costs related to the Cambridge supply agreement and inventory
purchase agreement. Increases in scrap/obsolescence costs, higher sales
royalties and the impact of pricing noted above partially offset the cost
improvements.
Total operating expenses increased $467,000, or 14%, for the first fiscal
quarter versus the prior year, and increased one point as a percent of sales to
43.9% from 42.9% versus the same period last year.
Research and development expenses for the first fiscal quarter increased
$158,000, or 40%, from the prior year. This increase is more than accounted for
by the cost of clinical studies, primarily the Phase I multi-site Premier
Platinum HpSA studies. Selling and marketing expenses are relatively flat
compared to the first fiscal quarter of last year, up $18,000, or 1%. U.S.
expenses increased approximately $90,000, or 6%, but were offset by a decrease
in European expenses of about $70,000, the majority being attributable to
currency as a result of the significant strengthening of the dollar versus the
Page 9 of 13
lira. General and administrative expenses increased $291,000, or 28%, for the
first fiscal quarter. These increases are attributable to personnel related
expenses, depreciation and maintenance contract expenses for the upgraded main
frame computer, an increase in the allowance for doubtful accounts and higher
outside legal expenses associated with patent filings. European expenses were
down nominally, but up adjusted for currency.
Operating income as a result of the above increased $205,000, or 13%, for the
first fiscal quarter and remained fairly constant as a percent of sales at
21.5%.
Other expense decreased $23,000 for the quarter which is due primarily to lower
interest expense. Gains/(losses) in foreign exchange were not material during
the periods. The cumulative foreign currency translation adjustment changed by
$89,000 during the quarter as a result of the U.S. dollar strengthening against
the lira compared to September 30, 1997.
The Company's effective tax rate increased less than one-half of one point
compared to the prior year.
Liquidity and Capital Resources
- -------------------------------
Net cash flows provided by operations declined $941,000, or 28%, to $2,362,000
for the quarter ended December 31, 1997. The increase in net working capital,
primarily in accounts receivable associated with the higher sales, a reduction
in inventories associated with the Cambridge acquisition in June 1996, and a
reduction in accounts payable versus the prior year, also associated with
Cambridge, were responsible for the lower operational funds flow.
Net cash used for investing activities increased $8,758,000 mainly as a result
of the sale of short-term investments of $8,026,000 in the prior year. The
majority of the balance of cash used for investing activities relates to
property, plant and equipment additions. Funds used for financing activities are
relatively consistent with the prior year and largely related to dividend
payments.
Net cash flows from operations is anticipated to fund working capital
requirements for the balance of the fiscal year. The Company has an unused
$12,500,000 line of credit with a commercial bank and cash/cash equivalents and
short-term investments of $22,708,000 at December 31, 1997.
Page 10 of 13
PART II. OTHER INFORMATION
Item 5. Other Information
On October 22, 1997 the Company announced that it had signed a multi-year
agreement for the distribution of selected rapid diagnostics tests through
Physician Sales and Service (PSS), Jacksonville, Florida. Under the terms of the
three-year agreement PSS will have exclusive physician office distribution
rights to Meridian's rapid, one-minute urinary tract infection test
FiltraCheck-UTIR, and, non-exclusive distribution rights to distribute other
rapid tests including technologies for detecting mycoplasma ("walking
pneumonia"), infectious mononucleosis, H. pylori (stomach ulcers), and certain
other products.
The Company was selected by Forbes magazine as one of the 200 Best Small
Companies in America for the second year in a row. According to Forbes,
companies are selected based upon a set of factors including growth and
profitability, plus various stock market factors. The analysis prepared by
Forbes indicated a 17.8% five-year average return on equity (ROE) for Meridian.
The Company announced on December 30, 1997 that its European subsidiary,
Meridian Diagnostics Europe (MDE), was certified as successfully implementing
formal quality assurance systems that conform to Internal Standards Organization
(ISO) Series 9002. Notification from the independent, non-profit federation of
Italian organizations, known as CISQ, was received on December 19th 1997. ISO
9002 is an internationally recognized set of standards which have been
established to maintain the highest levels of quality through continuous
improvement and adherence to total quality management.
On January 6, 1998 the Company announced that it had submitted to the Food
and Drug Administration (FDA) Premier Platinum HpSA, a unique noninvasive patent
pending test for the detection of helicobacter pylori antigens, for marketing
clearance. The test is performed on a stool specimen and requires about one hour
for final results. The H. pylori bacteria is now recognized as the leading cause
of peptic ulcer disease and recently has been classified as a definite
carcinogen associated with diseases such as gastric adenocarcinoma and gastric
lymphoma. According to estimates from the Centers for Disease Control and
Prevention, 25 million persons in the United States, where infection rates are
30-40% of the population, have had peptic ulcer disease during their lifetimes.
International infection rates can exceed 80%, especially among the populations
of Asian and Latin American Countries.
Page 11 of 13
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits-
Exhibit No. Description Page(s)
----------- ---------------------------------------- -------
11 Computation of earnings per common share 13
27 Financial Data Schedule 14-16
(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: January 29, 1998 /S/ GERARD BLAIN
-----------------------------------
GERARD BLAIN, Vice President,
Chief Financial Officer (Principal
financial officer)
Page 12 of 13