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, 1998
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. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 February 12, 1998
- --------------------------------------------------------------------------------
Common Stock, no par value 14,383,400
Page 1 of 22
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, 1998 and September 30, 1998 3-4
Consolidated Statements of Earnings
Three Months Ended December 31, 1998 and 1997 5
Consolidated Statement of Shareholders' Equity
Three Months Ended December 31, 1998 6
Consolidated Statements of Cash Flows
Three Months Ended December 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-15
PART II. OTHER INFORMATION
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K
Signature 17
Exhibit 27 Financial Data Schedule 18-20
Exhibit 99 Forward Looking Statements 21-22
Page 2 of 22
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1998 1998
CURRENT ASSETS: ------------ -------------
Cash and cash equivalents $ 5,056,302 $ 19,399,749
Investments 4,991,598 4,369,456
Accounts receivable and
notes receivable, less
allowance of $200,000 in
1999 and $171,000 in 1998
for doubtful accounts 11,439,602 9,706,678
Inventories 9,613,409 5,569,068
Prepaid expenses and other 1,052,293 379,013
Deferred tax assets 542,093 339,383
----------- -----------
Total current assets 32,695,297 39,763,347
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 982,189 332,043
Buildings and improvements 10,216,062 7,094,578
Machinery, equipment and furniture 11,400,461 8,524,192
Construction in progress 226,158 171,145
----------- -----------
Total property, plant and equipment 22,824,870 16,121,958
Less-accumulated depreciation
and amortization 7,666,424 7,312,889
----------- -----------
Net property, plant and equipment 15,158,446 8,809,069
` ---------- -----------
OTHER ASSETS:
Long term receivables and other 1,168,519 1,035,150
Deferred tax assets - 739,687
Deferred debenture offering costs,
net of accumulated amortization
of $305,000 in 1999 and $271,000
in 1998 1,023,086 1,056,836
Other intangible assets, net of
accumulated amortization of
$7,154,000 in 1999 and
$6,730,000 in 1998 6,422,179 6,537,478
Cost in excess of net assets acquired,
net of accumulated amortization of
$702,000 in 1999 and $539,000 in 1998 15,626,588 1,205,621
----------- -----------
Total other assets 24,240,372 10,574,772
----------- -----------
TOTAL ASSETS $72,094,115 $59,147,188
=========== ===========
Page 3 of 22
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, SEPTEMBER 30,
1998 1998
CURRENT LIABILITIES: ------------ -------------
Current portion of long-term and
capital lease obligations $1,041,040 $ 212,621
Accounts and notes payable 8,003,385 1,049,869
Accrued expenses 4,678,684 2,606,211
----------- -----------
Total current liabilities 13,723,109 3,868,701
----------- -----------
LONG-TERM AND CAPITAL LEASE OBLIGATIONS: 23,775,466 20,595,439
----------- -----------
DEFERRED TAX LIABLILITIES 140,027 -
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
1,000,000 shares authorized;
none issued - -
Common stock, no par value,
50,000,000 shares authorized;
14,382,891 and 14,382,613 shares
issued and outstanding, respectively,
stated at 2,397,606 2,397,420
Additional paid-in capital 20,654,270 20,652,802
Retained earnings 11,769,283 11,934,763
Accumulated other comprehensive income (365,646) (301,937)
----------- -----------
Total shareholders' equity 34,455,513 34,683,048
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $72,094,115 $59,147,188
=========== ===========
Page 4 of 22
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
-------------------------------------
1998 1997
-------------- -------------
NET SALES $11,719,977 $8,448,349
COST OF SALES 4,087,630 2,925,297
----------- ----------
Gross profit 7,632,347 5,523,052
----------- ----------
OPERATING EXPENSES:
Research and development 536,718 556,150
Selling and marketing 2,851,226 1,812,969
General and administrative 2,318,253 1,341,997
Restructuring costs 526,040 -
----------- ----------
Total operating expenses 6,232,237 3,711,116
----------- ----------
Operating income 1,400,110 1,811,936
OTHER INCOME (EXPENSE):
Interest income 188,592 251,234
Interest expense (601,941) (404,710)
Currency gains 15,108 1,567
Other, net 35,411 (16,239)
Total other income (expense) (362,830) (168,148)
----------- ----------
Earnings before income taxes 1,037,280 1,643,788
INCOME TAXES 483,565 672,208
----------- ----------
NET EARNINGS $ 553,715 $ 971,580
=========== ===========
BASIC WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 14,382,368 14,369,395
=========== ===========
BASIC EARNINGS PER COMMON SHARE $ .04 $ .07
=========== ===========
DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 14,554,376 14,711,905
=========== ===========
DILUTED EARNINGS PER COMMON SHARE $ .04 $ .07
=========== ===========
Page 5 of 22
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
Number
of Shares Accumulated
Issued Additional Other
and Comprehensive Common Paid-in Comprehensive Retained
Outstanding Income Stock Capital Income(Loss) Earnings Total
----------- -------------- ----------- ----------- ------------- ----------- -----------
Balance at September 30, 1998 14,382,613 ----- $2,397,420 $20,652,802 $(301,937) $11,934,763 $34,683,048
Stock Issuance 200 ----- 134 1,116 ----- ----- 1,250
Exercised Stock Options 78 ----- 52 352 ----- ----- 404
Dividends ----- ----- ----- ----- ----- (719,195)
(719,195)
Comprehensive Income
Net income ----- 553,715 ----- ----- ----- 553,715 553,715
Other comprehensive income
Foreign currency
translation adjustment ----- (63,709) ----- ----- (63,709) ----- (63,709)
Comprehensive Income ----- 490,006 ----- ----- ----- ----- -----
---------- =========== ---------- ----------- ---------- ----------- ----------
Balance at December 31, 1998 14,382,891 $2,397,606 $20,654,270 $(365,646) $11,769,283 $34,455,513
========== ========== =========== ========= =========== ===========
Page 6 of 22
ERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
-------------------------------------
1998 1997
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 553,715 $ 971,580
Non cash items:
Depreciation of property,
plant and equipment 673,095 338,562
Amortization of intangible
assets and deferred royalties 399,021 389,425
Deferred income taxes 515,759 (141,058)
Change in current assets and
current liabilities net of
effects of acquisition
Change in current assets excluding
cash/cash equivalents and
investments 2,683,219 89,384
Change in current liabilities,
excluding current portion of
long-term obligations 456,251 712,246
Long-term receivable and payable 338,867 2,001
----------- -----------
Net cash provided by
operating activities 5,619,927 2,362,140
========= =========
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Gull Laboratories,
Inc., net of acquired cash (17,139,739) --
Purchase of property, plant and
equipment, net (437,296) (434,141)
Purchase of short term investments (622,142) (440,850)
Purchase of product license (200,000) --
----------- ------------
Net cash used for investing
activities (18,399,177) (874,991)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from other long-term
obligations -- 174,701
Repayment of long-term obligations (840,467) (108,955)
Dividends paid (719,195) (970,087)
Proceeds from issuance of common stock 1,654 5,868
----------- ------------
Net cash used for financing
activities (1,558,008) (898,473)
----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (6,189) (58,094)
----------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (14,343,447) 530,582
CASH & CASH EQUIVALENTS AT BEGINNING
OF PERIOD 19,399,749 10,523,191
----------- ------------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 5,056,302 $11,053,773
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 3,566 $ 400,110
Interest 392,333 65,694
Page 7 of 22
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 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. Acquisition of Gull Laboratories, Inc.:
On November 5, 1998, the Company acquired all of the approximately eight
million shares of common stock of Gull Laboratories, Inc. (Gull) for $2.25
per share or approximately $18.0 million, in cash. The purchase price was
financed by cash and cash equivalents on hand. Gull is engaged in the
development, manufacture and marketing of high-quality diagnostic test kits
for the detection of infectious diseases and autoimmune disorders. Gull
also offers a line of instrumentation for laboratory automatio and products
for blood grouping and HLA tissue typing for transplantation. Fresenius AG,
a German stock company and the former majority shareholder of Gull
("Fresenius"), is subject to certain non-competition agreements, as are
certain employees of Gull upon their leaving the employment of the Company.
Amounts that Gull owed to Fresenius of $3,400,000, subject to various
adjustments as agreed to in the purchase agreement, will be paid to
Fresenius one-half on June 15, 1999 and the remaining half o December 31,
1999, with annual interest at 7.5%. 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. The resulting goodwill from this
transaction is being amortized over twenty years.
The following unaudited pro forma combined results of operations for the
year ended September 30, 1998 and the quarters ended December 31, 1998 and
1997, assumes the Gull acquisition occurred as of October 1, 1997 (dollars
in thousands, except per share data). Pro forma adjustments consist of
reductions in interest income due to the use of cash and investments to
fund the acquisition, additional amortization based on a preliminary
estimate of goodwill and adjustments to the tax provision assuming an
effective tax rate of 38%, 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 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, 1997 or the results of operations
of the combined companies.
Page 8 of 22
Year Ended 3 Months Ended
September 30, 1998 December 31,
------------------ --------------------
1998 1997
---------- ---------
Net sales.......................... $53,535 $13,210 $13,856
Net earnings (loss)................ $ 92 $ 627 $ (342)
Earnings (loss) per share:
Basic............................ $ 0.01 $ 0.04 $ (0.02)
Diluted.......................... $ 0.01 $ 0.04 $ (0.02)
In connection with the acquisition of Gull, assets were acquired and liabilities
were assumed as follows, based upon preliminary estimates of fair values
(dollars in thousands):
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
Cash and equivalents............... $ 640
Accounts and notes receivable...... 3,285
Inventories........................ 6,438
Other current assets............... 552
Property, plant and equipment...... 5,717
Other non-current assets........... 1,425
Goodwill........................... 14,595
-------
32,652
Less: Cash paid for net assets....... 18,000
-------
$14,652
=======
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed................ $ 5,767
Additional purchase liabilities.... 1,963
Debt............................... 5,922
Acquisition costs.................. 1,000
-------
$14,652
=======
These estimates are subject to change and, upon the completion of certain
appraisals and other analyses of the fair value of assets acquired and
liabilities assumed, as well as completion of the final audit as of October
31, 1998, may differ from the amounts presented above. The allocation of
purchase price may include an allocation to in-process research and
development. In fiscal 1999, the Company plans to close the Salt Lake City
and certain other facilities of Gull, sell the Gull land and buildings in
Salt Lake City, transfer equipment, technology and manufacturing
capabilities to the Company's headquarters in Cincinnati and terminate
substantially all Gull employees. Additional purchase liabilities recorded
to date include approximately $2.0 million for severance and costs related
to the shut down and consolidation of the acquired facilities in Salt Lake
City and certain other facilities of Gull. Future liabilities to be
recorded will include additional costs associated with the shut down and
consolidation of these facilities once identified.
Page 9 of 22
3. Inventories:
Inventories are comprised of the following (amounts in thousands):
December 31, 1998 September 30, 1998
----------------- ------------------
Raw materials $3,295 $1,480
Work-in-process 1,926 1,715
Finished goods 4,392 2,374
------ ------
$9,613 $5,569
====== ======
4. 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.
5. 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.
At both December 31, 1998 and 1997, the impact of assuming the 1996
convertible debentures were converted, net of the impact of pro forma,
after tax interest expense, was antidilutive. The table below shows the
amounts used in computing earnings per share and the effect on income and
the weighted average number of shares for the three months ended December
31, 1998 and December 31, 1997 of dilutive potential common stock.
Page 10 of 22
QUARTER ENDED
---------------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------- ----------------------------------------
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 $554 14,382 $0.04 $972 14,369 $0.07
- -----------------------------------------------------------------------------------------------------
EFFECT OF
DILUTIVE
SECURITIES
Stock Options --- 172 --- --- 343 ---
- -----------------------------------------------------------------------------------------------------
DILUTED EARNINGS
PER SHARE
Net income
available
to common
shareholders
and assumed
conversions $554 14,554 $0.04 $972 14,712 $0.07
- -----------------------------------------------------------------------------------------------------
6. Translation of Foreign Currency:
Assets and liabilities of foreign operations are translated using quarter
end exchange rates. 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 other comprehensive income.
Gains and losses resulting from transactions in foreign currencies were
immaterial.
7. Comprehensive Income:
During 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130 (Statement 130) on "Reporting Comprehensive Income". The
Company adopted this standard effective October 1,1998. 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
Page 11 of 22
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
shareholders' equity.
8. Segment Information:
During 1997, the FASB issued Statement No. 131 (Statement 131) on
"Disclosure About Segments of an Enterprise and Related Information". The
Company will adopt Statement 131 this fiscal year; however, there are no
interim reporting requirements in the initial year of adoption. The Company
is still evaluating the impact of the new disclosure requirements in light
of the Gull acquisition, but does not expect the disclosure requirements to
significantly impact its financial position or results of operations.
9. Reclassifications:
Certain reclassifications have been made to the accompanying financial
statements to conform to the December 31, 1998 presentation.
10. Recently Issued Accounting Standards:
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 establishes 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
its fair value. The Company does not currently hold nor invest in any type
of derivative instruments.
In March 1998, the AICPA issued SOP98-1- "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" which requires
capitalization of external direct costs of materials and services consumed
in developing or obtaining internal-use computer software; payroll and
payroll-related costs for employees who are directly associated with and
who devote time to the internal-use computer software project (to the
extent of the time spent directly on the project); and interest costs
incurred when developing computer software for internal use. Training
costs, data conversion costs, costs incurred in the preliminary project
stage and maintenance fees should be expensed as incurred. Additionally,
significant updates and enhancements are capitalized if it is probable that
the result will be significant additional functionality or an increase in
the life of the software. The capitalization of computer software developed
or obtained for internal use should be amortized on a straight-li basis
unless another systematic and rational manner is more representative of the
use of the software. This SOP is effective for financial statements for
fiscal years beginning after December 15, 1998 (the Company's fiscal year
2000), and should be applied to internal-use computer software costs
incurred in those fiscal years for all projects, including projects in
progress upon initial application of the SOP. The Company does not expect
adoption of this accounting pronouncement will have a material impact on
the Company's financial position or operating results.
Page 12 of 22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Background
On November 5, 1998, the Company acquired all of the approximately eight million
shares of common stock of Gull Laboratories, Inc. (Gull) for $2.25 per share or
approximately $18.0 million, in cash. The purchase price was financed by cash
and cash equivalents on hand. Gull is engaged in the development, manufacture
and marketing of high-quality diagnostic test kits for the detection of
infectious diseases and autoimmune disorders. Gull also offers a line of
instrumentation for laboratory automation and products for blood grouping and
HLA tissue typing for transplantation. Fresenius AG, a German stock company and
the former majority shareholder of Gull ("Fresenius"), is subject to certain
non-competition agreements, as are certain employees of Gull upon their leaving
the employment of the Company. Amounts that Gull owed to Fresenius of
$3,400,000, subject to various adjustments as agreed to in the purchase
agreement, will be paid to Fresenius one-half on June 15, 1999 and the remaining
half on December 31, 1999, with annual interest at 7.5%. 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. The resulting goodwill from this transaction is
being amortized over twenty years. See Note 2 of the Notes to Consolidated
Financial Statements for further information.
Results of Operations:
Net sales increased $3,272,000 or 39%, to $11,720,000 for the first fiscal
quarter compared to the prior year, primarily from the strong sales of Gull
products for the two months ended December 31, 1998. This increase of $3,272,000
was comprised of volume growth of $2,971,000, or 35%, pricing of $238,000, or
3%, and currency of $63,000, or 1%.
Core business product sales were down about 6% versus the prior year. This
decrease was largely a result of lower OEM sales (primarily virology products),
the impact of reduced purchases from distributors being replaced by the Gull
direct sales force in selected European countries and the effect of U.S.
distributors reducing their inventories, a situation that began during the third
fiscal quarter of fiscal 1998 and carried-over into October 1998.
The majority of this decrease, versus the prior year, was reflected in the
Para-Pak, C. difficile and virology lines. New product sales led by Premier
Platinum HpSA(TM) (H. pylori), contributed over $300,000 in incremental revenues
compared to the prior year. The H. pylori product line in total was up 24%.
Gross profit increased $2,109,000, or 38% compared to the sales increase of 39%
and remained at 65% as a percentage of sales in both the first fiscal quarters
of 1999 and 1998. Though flat in total, gross profit improved 1% as a result of
the sell-out during the quarter ended December 1997 of Cambridge product
purchased in 1996 under an inventory purchase agreement. Gross profit now
reflects lower production costs in Cincinnati compared to the cost of inventory
purchased from Cambridge. Additionally, the gross profit reflects improvement of
1.4% due to increased sales of Premier Platinum HpSA and improved pricing as
noted above. Offsetting these improvements in gross profit is the effect of the
Gull acquisition. The gross profit on Gull products for the two -month period
ended December 31, 1998 was approximately 61% causing an overall decrease in the
margin of 2.5%. The Company expects that this drag on the overall gross profit
will continue until the Company is able to complete the integration of Gull's
production into the Cincinnati facilities and sell-out of Gull's Salt Lake City
production, which is expected to occur in about 12-15 months.
Page 13 of 22
Total operating expenses increased $2,521,000, or 68%, for the first fiscal
quarter of 1999 versus the prior year, and increased to 53% of sales from 44%
versus the same period last year, primarily due to the Gull acquisition.
Specifically, research and development costs remained flat at approximately
$550,000 compared to the prior year but decreased to 5% of sales from 7%
compared to the same period last year. Clinical study costs of approximately
$150,000 related to United States Food and Drug Administration (FDA) approval of
Premier Platinum HpSA were incurred in the first quarter of last year. FDA
approval was obtained in May 1998. This decrease was offset by research and
development costs of Gull in the first fiscal quarter of 1999. Selling and
marketing expenses increased $1,038,000, or 57%, for the first fiscal quarter
and increased as a percent of sales to 24% from 21% versus the same period last
year. This increase is primarily related to the Gull acquisition. The remaining
increase pertains to personnel related costs. General and administrative costs
increased $976,000, or 73%, for the first quarter and increased to 20% of sales
from 16% compared to the same period last year. This increase is also
attributable to the Gull acquisition, including the effect of higher
amortization costs on Gull-related goodwill. In connection with the Gull
acquisition, the Company incurred restructuring costs of approximately $526,000
during the first fiscal quarter of 1999. These costs consist mainly of payments
of $275,000 made to distributors to terminate contracts in markets with
duplicate distributor agreements or in markets that will now be covered by the
Company sales force, and approximately $250,000 related to training and travel
in connection with the integration of the Gull business. Additional
restructuring costs are expected to be incurred in connection with the ongoing
integration efforts.
Operating income as a result of the above decreased $412,000, or 23% for the
first fiscal quarter and decreased as a percent of sales to 12% from 21%.
Excluding the restructuring costs of $526,000 noted above, operating income for
the first fiscal quarter increased $114,000, or 6%, compared to the same quarter
in the prior year. Other expense increased $195,000 for the first fiscal
quarter. This increase is primarily related to the addition of $197,000 in
interest expense for Gull-related obligations. The Company's effective tax rate
increased from 41% to 47%. The Company has elected not to record a benefit for
the full amount of losses incurred in Gull's foreign operations pending the
resolution of tax planning strategies that are being designed to utilize such
losses, along with the net operating loss carryforwards acquired in the Gull
acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by operations increased $3,258,000 for the quarter ended
December 31, 1998, primarily due to cash funded by working capital items.
Net cash used for investing activities increased $17,524,000 mainly as a result
of cash paid for the purchase of Gull of $17,140,000, which includes transaction
costs of $386,000 and is net of cash acquired of $640,000.
Net cash flows used for financing activities increased $660,000 largely due to
payments made on debt obligations assumed in the Gull acquisition.
Net cash flows from operations are anticipated to fund working capital
requirements for the balance of the fiscal year. The Company has an unused
$15,000,00 line of credit with a commercial bank and cash/cash equivalent and
short-term investments of $10,048,000 at December 31, 1998.
IMPACT OF YEAR 2000
The Year 2000 issue results from date sensitive computer programs that only use
the last two digits to refer to a year. Such computer programs may not properly
recognize years subsequent to 1999. This issue impacts the Company and virtually
every business that relies on a computer. If not corrected, system failures or
miscalculations could occur causing disruption of the Company's operations,
including among other things, a temporary inability to process transactions or
to engage in similar normal busines activities.
Page 14 of 22
A project team has been formed to address the Company's Year 2000 readiness.
Information technology (IT) systems, such as any hardware or software used to
process daily operational data and information, as well as non-information
technology systems, such as computer chips embedded in manufacturing, laboratory
and telecommunications equipment, are being assessed for Year 2000 compliance.
In November 1997, the Company completed a major upgrade of its computer hardware
and primary business system applications in the U.S. as part of planned system
enhancements to support the business. The cost of the upgrades, which are Year
2000 compliant, was approximately $400,000. The Company is in the process of
identifying and assessing the compliance of other IT and non-IT systems, and
developing remediation plans, including engaging consultants to install the
Company's current business system in Belgium and Germany and upgrading the
system in Italy as these systems are not currently Year 2000 compliant. The
Company expects that many of the existing Gull operations and related systems in
the U.S. will be integrated into the Meridian operation during fiscal year 1999.
These assessment efforts are expected to be completed by the end of the second
quarter of fiscal 1999. Remediation efforts, which are already underway may
include modifications or replacement of software and certain hardware. The
Company anticipates completion of all remediation and testing of its systems by
the end of fiscal 1999.
The Company is evaluating the status of significant customers and suppliers to
determine the extent to which it is vulnerable to these third parties. Ongoing
evaluation will continue through 1999; however, the Company believes its broad
customer base and availability of alternate suppliers will mitigate the risks
associated with these third parties.
The Company has not yet developed a formal contingency plan in the event its
Year 2000 efforts are not completed in a timely manner; however, contingency
measures will be identified as systems are assessed for those requiring
remediation. For example, the contingency plan for an IT system may be to revert
to a manual system, and, for many non-it systems, internal clocks could be reset
to an earlier date. A formal contingency plan will be developed, as required, as
remediation and testing procedures are completed in 1999.
Costs specifically associated with the Company's Year 2000 efforts have
consisted mainly of internal costs and have been immaterial. Estimated costs to
complete are not currently expected to be significant. Costs pertain primarily
to systems software and hardware replacements and upgrades and non-IT systems
replacements and upgrades.
Although the Company has not yet completed its Year 2000 efforts, after certain
upgrades and replacements are made, it believes the Year 2000 issue will not
pose significant operational problems. However, if such modifications are not
made or are not completed in time, or if a material third party fails to
properly remediate its Year 2000 issues, or if the costs are higher than
expected, the Year 2000 issue could have a material effect on the Company's
operations. While the Company is not currently aware of any significant
exposure, there can be no assurance that the Year 2000 issue will not have a
material impact on the business and operations of the Company.
The Company is also in the process of assessing the impact of the conversion to
the Euro on its systems and business operations. The conversions and upgrades of
the European systems noted above will also enable these operations to process
Euro transactions. The Company does not currently 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.
Page 15 of 22
PART II. OTHER INFORMATION
Item 5. Other Information
On December 7, 1998, the Company announced that it received FDA clearance to
market two new tests for the waterborne parasites Giardia and Cryptosporidium.
Giardia has become one of the world's most common intestinal parasitic diseases
infecting more than two million people annually in the U.S. alone.
Cryptosporidium, also transmitted via improperly treated drinking water, causes
serious disease especially in persons with AIDS and other immuno-compromised
conditions. Premier(TM) Giardia and Premier Cryptosporidium, both enzyme
immunoassays, can detect the presence of the respective parasite antigens in
less than two hours from a simple stool specimen. The products utilize
Meridian's "gold standard" monoclonal antibodies that help yield superior
performance. The worldwide market for Giardia and Cryptosporidium testing is
approximately $20 million annually.
On December 22, 1998, the Company announced that it received clearance from the
FDA to market Premier Platinum HpSA(TM) (Helicobacter pylori Stool Antigen) to
monitor therapeutic response in patients with H. pylori infection. Premier
Platinum HpSA was initially cleared for marketing in May 1998 for diagnosis of
H. pylori infection. H. pylori is the bacteria that causes most stomach ulcers.
The Premier Platinum HpSA enzyme immunoassay (EIA) is the first and only
noninvasive direct procedure for the detection and monitoring of H. pylori
antigens in human stool.
On December 29,1998, the Company announced that its Premier Platinum HpSA
stomach ulcer test is now available through Quest Diagnostics Incorporated and
its network of laboratories. Quest Diagnostics, headquartered in Teterboro, New
Jersey, is one of the nation's leading providers of diagnostic testing,
information and services to physicians, hospitals, managed care organizations,
employers and government agencies.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description Page(s)
----------- -------------------------- -------
27 Financial Data Schedule 17-19
99 Forward Looking Statements 20-21
(b) Reports on Form 8-K:
Form 8-K (Item 2) filed on November 13, 1998 relating to the
First Amendment to the Merger Agreement among Gull Laboratories,
Inc., Fresenius AG and Meridian Acquisition Co.
Page 17 of 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: February 12, 1999 /S/GERARD BLAIN
--------------------------------
Gerard Blain, Vice President
Chief Financial Officer
(Principal Financial Officer)
Page 17 or 22