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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________________
TO _________________________.
Commission File No. 0-14902
MERIDIAN DIAGNOSTICS, INC.
Incorporated under 3471 River Hills Drive IRS Employer ID
the Laws of Ohio Cincinnati, Ohio 45244 No. 31-0888197
Phone: (513) 271-3700
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock
Indicate by 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, and (2) has been subject to such filing requirements
for the past 90 days.
YES NO
X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value of Common Stock held by non-affiliates is
$109,740,000 based on a closing sale price of $12.00 per share on December 13,
1996. As of December 13, 1996, 14,284,140 shares of no par value Common Stock
were issued and outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Shareholders for 1996 furnished to
the Commission pursuant to Rule 14a-3(b) and portions of the Registrant's Proxy
Statement filed with the Commission for its 1996 Annual Meeting are incorporated
by reference in Parts II and III as specified.
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MERIDIAN DIAGNOSTICS, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Page
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Part I
Item 1 - Business 3
Item 2 - Properties 15
Item 3 - Legal Proceedings 16
Item 4 - Submission of Matters to a Vote of Security Holders 17
Part II
Item 5 - Market for Registrant's Common Equity
and Related Stockholder Matters 17
Item 6 - Selected Financial Data 18
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 8 - Financial Statements and Supplementary Data 18
Item 9 - Disagreements on Accounting and Financial Disclosure 19
Part III
Item 10 - Directors and Executive Officers of the Registrant 19
Item 11 - Executive Compensation 19
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 19
Item 13 - Certain Relationships and Related Transactions 19
Part IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 19
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PART I.
ITEM 1.
BUSINESS
GENERAL
The Company develops, manufactures and markets a diverse line of
disposable diagnostic test kits and related diagnostic products used for the
rapid diagnosis of infectious diseases. To meet market demands, the Company's
products provide accuracy, simplicity, and speed, leading to opportunities for
improvements in diagnosis and reductions in health care costs. All of the
Company's products are used in procedures performed in vitro (outside the body)
and require little or no special instrumentation or equipment.
The Company's product development strategy is to combine existing
technologies with new product designs both through internal product development
and through product acquisitions, licensing or supply arrangements. Internal
product development activities focus on the development or enhancement of
immunodiagnostic technologies and applications to simplify, accelerate or
increase the accuracy of diagnoses of certain infectious diseases. Since 1991,
the Company has also acquired or obtained rights to distribute a number of
products and technologies.
The Company utilizes its resources to serve each of the strategic
domestic and international medical markets it has targeted: hospital networks
and clinical and hospital laboratories; alternate site markets, including
physicians' offices, outpatient clinics, nursing homes and health maintenance
organizations (HMOs); and new markets, including veterinary laboratories, water
treatment facilities and consumer self-testing. The Company markets
approximately 100 products representing five major disease states through a
direct sales force in the U.S. and Italy, supplemented by a network of national
and international distributors. International sales in approximately 50
countries were approximately 26% of total fiscal 1996 sales, with approximately
83% of international sales originating in Western Europe. The majority of the
remaining international sales were from Canada, Mexico and the Pacific Rim.
ACQUISITION STRATEGY
An important facet of the Company's long-term business strategy is the
acquisition, licensing or entrance into supply arrangements to obtain innovative
diagnostic testing technologies, product formats and products that complement
its existing operations and address the needs of the Company's existing and
targeted customer base. Historically, Company management has pursued the
acquisition and licensing of products and technologies that fit the Company's
niche diagnostic test markets, which are characterized by a large number of
users. Examples of this strategy include the acquisitions of the mononucleosis
and infectious disease product lines in fiscal 1993 and 1994 respectively from
Johnson & Johnson for approximately
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$3.4 million each, the June 1996 acquisition of the enteric product line of
Cambridge Biotech Corporation for approximately $6.7 million and numerous
smaller product acquisitions and licensing arrangements. A key component in the
success of the Company's acquisition and licensing of new products and
technologies has been the ability of Company management to respond quickly to
acquisition and licensing opportunities as they arise in the marketplace. The
success of this strategy has also been due in part to management's selective
acquisition and licensing philosophy as well as availability of cash.
June 1996 Acquisition
On June 24, 1996, the Company acquired the enteric product line of
Cambridge Biotech Corporation. The line consists of diagnostic products which
identify Adenovirus, Rotavirus, C. difficile and Lyme disease, all of which are
enzyme immunoassay microtiter formats, similar to the Company's existing Premier
products. This line consists of the branded products Adenoclone, Rotaclone,
Cytoclone and a product for the detection of Lyme disease. Along with the
Company's Meritec and ImmunoCard products, the addition of Rotaclone and
Adenoclone makes the Company an industry leader in the pediatric diarrhea
diagnostic market. Cytoclone is the first direct test available for the
detection of the C. difficile Toxin B. The Lyme disease diagnostic test is a
complementary product offering in the Company's parasitic disease area.
The Company paid Cambridge Biotech Corporation $6,678,000 million in
cash for the acquired enteric product line and related rights and assets, which
purchase price was allocated to: an advance on royalties of $200,000; inventory
valued at $830,000; fixed assets valued at $200,000 and intangibles valued at
$5,448,000. The Company also assumed certain royalty obligations of Cambridge
Biotech Corporation.
The acquired products will be distributed on a direct basis throughout
the United States by the Company's own sales force and through current
distributors internationally, primarily in Germany and Japan. Approximately 65%
of the acquired products are sold in the U.S.
IMMUNODIAGNOSTICS OVERVIEW
In vitro diagnostic testing is the process of analyzing constituents of
blood, urine, stool, other bodily fluids or tissue for the presence of specific
infectious diseases. Immunodiagnostic testing, which is the leading method of in
vitro testing for infectious diseases, tests for antigens and antibodies. When
an infectious disease caused by pathogens, such as bacteria, viruses and fungi,
and their related antigens is present, the body responds by producing an
antibody. The antibody binds specifically with the antigen in a lock-and-key
fashion and initiates a biochemical reaction to attempt to neutralize and
ultimately to eliminate the antigen. The ability of an antibody to bind with a
specific antigen provides the basis for immunodiagnostic testing.
Immunodiagnostic testing detects the presence of specific infectious
diseases through the "visualization," such as color changes or the formation of
visible aggregates, of the biochemical reactions caused by the antigen/antibody.
Most immunodiagnostic tests utilize one of two
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alternative methods to determine the presence of a specific disease in a patient
specimen. In one method, the test employs the antibody to detect directly the
presence of an antigen. Alternatively, certain tests employ the antigen to
detect the presence of an antibody.
MARKET TRENDS
The global market for infectious disease tests continues to expand as
new disease states are identified, new therapies become available and worldwide
standards of living and access to healthcare improve. More importantly, within
this market there is a continuing shift from conventional testing, which
requires highly trained personnel and lengthy turnaround times for test results,
to more technologically advanced testing which can be performed and completed in
minutes or hours by less highly trained personnel.
Technological advances permitting accurate testing to occur outside the
traditional hospital or laboratory setting have also affected the market for
diagnostic products. These technological developments have contributed to the
emergence of alternate site markets, such as physicians' offices, outpatient
clinics, nursing homes and HMOs, as important diagnostic market segments. These
technological advances should also contribute to the development of new markets
for the Company's products, including veterinary laboratories, water treatment
facilities and consumer self-testing in the over-the-counter market.
The increasing pressures to contain total healthcare costs have
accelerated the increased use of diagnostic testing and the market shift to
alternate sites. With rapid and accurate diagnoses of infectious diseases,
physicians can pinpoint appropriate therapies quickly, leading to faster
recovery, shorter hospital stays and less treatment expense. In addition, these
pressures have led to a major consolidation among reference laboratories and the
formation of multi-hospital alliances that have reduced the number of
institutional customers for diagnostic products and resulted in changes in
buying practices. Specifically, multi-year exclusive or primary source marketing
or distribution contracts with institutional customers have become more common,
replacing less formal distribution arrangements of shorter duration and
involving lower product volumes.
STRATEGY
The Company continues to execute its long-term strategy consisting of
the following elements:
- DEVELOPING NEW PRODUCT APPLICATIONS FROM CORE TECHNOLOGIES AND
FORMATS. The Company employs a market-driven product
development strategy to adapt or enhance diagnostic testing
technologies and product formats in response to newly
identified disease states and customer demands for
improvements in product accuracy, simplicity, speed and
cost-efficiency. The Company accomplishes this by monitoring
existing markets, interacting closely with its customers and
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recognizing emerging diseases and therapies. Since 1991, the
Company has developed and introduced 23 internally developed
products.
- ACQUIRING AND LICENSING PRODUCTS AND TECHNOLOGY. The Company
intends to acquire, license or enter into supply arrangements
to obtain innovative diagnostic testing technologies, product
formats and products that complement its existing operations
and address the needs of the Company's existing and targeted
customer base. Management regularly identifies and reviews
opportunities through its broad industry contacts and
recognized position in the industry. Since 1991, the Company
has acquired, licensed or entered into supply arrangements
relating to 33 products, five of which were acquired in June
1996 from Cambridge Biotech Corporation.
- INCREASING INTERNATIONAL SALES. The Company has targeted
international sales as an attractive source of growth. The
Company has made recent investments to develop a major
presence in Italy through its Italian subsidiary, Meridian
Diagnostics Europe s.r.l. ("MDE"), added management to expand
its ability to serve Latin American markets and to strengthen
its distribution channels into the European market. Over the
last four years, the Company's international sales have grown
from $2.1 million in fiscal 1992 to $7.8 million in fiscal
1996 and represented 26% of total consolidated sales in fiscal
1996.
- DEVELOPING PARTNERSHIPS WITH CONSOLIDATED HEALTHCARE
ORGANIZATIONS. The Company seeks to develop strategic
partnerships with the major reference laboratories and other
consolidated healthcare providers. The Company believes it is
in a position to develop partnerships because it is an
integrated manufacturer, has a broad product line, offers
tests in multiple formats, and is willing to invest resources
in building relationships and facilitating open communications
with those large customers. In January 1996, the Company
signed a three-year exclusive agreement with a major hospital
alliance of approximately 350 hospitals for the Company to
provide all parasitology transport products and specific
infectious disease diagnostic products. In April 1996, the
Company signed a three-year, primary source agreement with a
major reference laboratory chain consisting of over 35
laboratories for the supply of certain products for
parasitology, virology and other infectious diseases.
- ENTERING NEW MARKETS. The Company continues to monitor and
identify the emergence of new immunodiagnostic testing
opportunities arising from the discovery of new pathogens or
new linkages between existing pathogens and new diseases. In
April 1995, the Company introduced the first immunodiagnostic
test for toxigenic E. coli, a bacteria found in inadequately
cooked meats as well as many other food products. The Company
plans to apply for approvals to test both animals (United
States Department of Agriculture) and food products
(Association of Analytical Chemists) that may contain this
highly toxic organism.
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In September 1996, the Company began marketing its two tests
for the detection of E. coli bacterial toxins to U.S. food
testing laboratories via an exclusive distribution agreement
with Fisher Scientific Inc. In July 1994, the Company agreed
to provide its Hydrofluor product, the first product that
tests for water-borne parasitic pathogens, specifically
Giardia and Cryptosporidium, for distribution through an
independent supplier to water treatment facilities. The
Company has also entered into an agreement with Johnson &
Johnson to market the Company's rapid diagnostic test for
urinary tract infections to the consumer market, subject to
pre-market approval by the FDA, the timing of which cannot be
predicted.
- ACCESSING ALTERNATE SITE MARKETS FOR DIAGNOSTIC TESTING. The
Company seeks strong licensing/distribution partners having
sales and marketing strengths to enable them to promote more
effectively the Company's products into alternate site
markets. The Company believes that its products are readily
adaptable for use in alternate site markets. In August 1995,
the Company entered into an exclusive licensing agreement with
a third party which through its 90 representatives will
distribute the Company's urinary tract infection product to
the physician office market. The Company continues to evaluate
the suitability of certain of its other products for the
consumer market.
PRODUCTS
The Company has expertise in the development and manufacture of
products based on multiple core diagnostic technologies, each of which enables
the visualization and identification of antigen/antibody reactions for specific
pathogens. As a result, the Company is able to develop and manufacture
diagnostic tests in a variety of formats that satisfy customer needs and
preferences, whether in a hospital, commercial or reference laboratory or
alternate site location. These technologies include enzyme immunoassay,
immunofluorescence, particle agglutination, membrane filtration/concentration,
immunodiffusion, complement fixation and chemical stains.
ENZYME IMMUNOASSAY (EIA). Products incorporating the EIA technology
achieve extremely high levels of accuracy in detecting disease-related antigens
or antibodies through the use of special color-based enzyme-substrate reactions.
The Company utilizes this technology in its multiple test format - Premier --
for large volume users, and in its single test formats - ImmunoCard and Monolert
- -- for single physician users.
IMMUNOFLUORESCENCE. When the microscopic visualization of an
antigen-antibody reaction is necessary or desired, immunofluorescence technology
is frequently utilized. Fluorescing immunochemicals, in the presence of the
target antigen or antibody, can be viewed via a special microscope. The Company
utilizes this technology in its Merifluor products.
PARTICLE AGGLUTINATION. This technology utilizes microparticles (e.g.,
latex, red blood cells) coated with specific antigens or antibodies that form
visible aggregates in the presence of a
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specimen containing the complementary antigen or antibody. This technology is
rapid and economical and is used in the Company's Meritec, MeriStar and Monospot
products.
MEMBRANE FILTRATION/CONCENTRATION. The Company utilizes this technology
to detect infection-causing bacteria present in human urine. These bacteria are
concentrated on a unique filter membrane for detection via the addition of a
special dye solution. This technology is utilized in the Company's proprietary
rapid, single-unit FiltraCheck-UTI test format.
OTHER TECHNOLOGIES. The Company utilizes other technologies that
include immunodiffusion, complement fixation and chemical stains. The Company
also manufactures and markets specimen collection, transportation, preservation
and concentration products, such as Para Pak and Macro-Con.
The Company's product line consists of nearly 100 medical diagnostic
products representing five major disease states. Currently, the most important
product lines from the perspective of sales are Para Pak and related products
and products to diagnose gastrointestinal, viral and respiratory diseases. The
Company's products generally range in list price from $1 per test to $13 per
test. A discussion of Company's key products and their competitive advantage
appears in the following table:
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INFECTIOUS DISEASE CATEGORY KEY PRODUCT(S) PRODUCT APPLICATION
- ----------------------------------------------------------------------------------------------------------------------
PARASITIC DISEASES
- - Giardiasis
- - Cryptosporidiosis Para-Pak, Premier, Meritec, Products for the diagnosis and collection,
- - Amebiasis Para-Pak Ultra, Para-Pak Plus, preservation, transportation and concentration of
- - Lyme Disease Macro-Con parasites.
- ----------------------------------------------------------------------------------------------------------------------
GASTROINTESTINAL DISEASES
- - Stomach Ulcers (H. pylori) Premier, ImmunoCard U.S. patients make 20 million annual visits to
their physicians for gastric distress. The H.
pylori bacteria has been associated with more
than 90% of duodenal ulcers and may be related
to cancer of the stomach.
- - Toxigenic E. Coli Premier E. coli is a potentially lethal bacteria that infects
undercooked food and can cause kidney failure.
- - Antibiotic-associated Diarrhea Premier, ImmunoCard, Toxin producing strains of C. difficile can cause
(C.difficile) Meritec, Cytoclone PMC (pseudomembranous colitis) that results in
rapid colon degeneration.
- - Pediatric Diarrhea (Rotavirus, ImmunoCard, Meritec, These viral diseases, which cause rapid
Adenovirus) Rotaclone, Adenoclone dehydration, are transmitted rapidly through
pediatric populations in hospitals, schools and
daycare settings.
- ----------------------------------------------------------------------------------------------------------------------
RESPIRATORY DISEASES
- - Pneumonia (Mycoplasma pneumoniae) ImmunoCard, MeriStar Pneumonia is the fifth leading cause of death
worldwide, 20% of which is caused by
Mycoplasma pneumoniae
- - Valley Fever (Coccidioides immitis) Premier, Meritec Fungal pathogens can cause flu-like illness
and/or severe pneumoniae, that are life-
threatening in AIDS and other immuno-
compromised patients.
- ----------------------------------------------------------------------------------------------------------------------
UROGENITAL DISEASE
- - Urinary Tract Infection FiltraCheck-UTI In the U.S., 65 million cultures are performed
yearly to detect potential urinary tract infection.
- - Chlamydia Premier, Merifluor Chlamydia is the leading sexually transmitted
disease.
- ----------------------------------------------------------------------------------------------------------------------
VIRAL DISEASES
- - Infectious Mononucleosis ImmunoCard, Monolert, Monospot Infectious mononucleosis, a viral disease
common among young adolescents, is
transmitted easily from person-to-person.
- - Herpes simplex Virus (HSVI and Premier Oral Herpes infections affect up to 80% of
HSVII) certain populations. Genital Herpes can be
life-threatening to newborns.
- - Cytomegalovirus Merifluor Cytomegalovirus infections are potentially
deadly in transplant procedures and among
immunocomprised blood recipients.
- ----------------------------------------------------------------------------------------------------------------------
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COMPETITIVE ADVANTAGE MARKET
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Leading supplier of parasitology diagnostics. In October 1995, introduced two - Hospital Laboratories
new products that resulted in easier processing, safer handling and reduced - Reference Laboratories
processing time of the specimen and lower cost disposal of transport container. - Veterinary Laboratories
- ------------------------------------------------------------------------------------------------------------------------------------
Historically, a physician-performed endoscopy, an extremely uncomfortable and - Hospital Laboratories
expensive procedure, was employed to diagnose gastric distress. The Company's - Reference Laboratories
tests allow accurate, quick diagnoses utilizing patient blood serum. The Company - Veterinary Laboratories
is the only manufacturer to provide testing formats which accommodate both small - State Health Laboratories
and large volume users.
In November 1995, introduced the first and only FDA cleared diagnostic test that
rapidly detects all toxigenic strains of E. coli directly from stool samples.
Previous techniques required a minimum of 24 hours to culture E. coli organisms.
Market leader with a broad range of products.
Offers the clinician quick results which are critical in preventing the spread
of these highly infectious viruses.
- ------------------------------------------------------------------------------------------------------------------------------------
The Company provides the broadest range of diagnostic reagents for detecting - Hospital Laboratories
respiratory diseases. The product is a rapid test providing results in only ten - Reference Laboratories
minutes. The product provides increased accuracy over common diagnostic methods, - State Health Laboratories
allowing for a safer, more effective treatment. - Veterinary Laboratories
- ------------------------------------------------------------------------------------------------------------------------------------
The product allows for rapid screening for the presence of urinary tract - Hospital Laboratories
infection. Therapy can be rapidly administered, often while the patient is still - Reference Laboratories
in the physician's office. - Physicians' Office Laboratories
- Consumer (pending)
Both product formats enable rapid, accurate testing. - Public Health Laboratories
- ------------------------------------------------------------------------------------------------------------------------------------
The Company provides a broad range of innovative technologies including Monolert - Hospital Laboratories
which use synthetic peptides to detect the virus which causes mononucleosis. - Reference Laboratories
- Physicians' Office Laboratories
- Student Health Laboratories
Premier HSV Plus detects both HSVI and HSVII rapidly from a variety of body
sites.
Quickly detects "immediate early antigen" in a rapid, direct fluorescence
format.
- ------------------------------------------------------------------------------------------------------------------------------------
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MARKETING AND SALES
The Company's marketing efforts are focused on a continual process of
seeking ways to assist healthcare providers in improving outcomes for patients
exposed to serious infectious diseases. Rapid, accurate diagnosis can mean
faster recovery, shorter hospital stays and less expense, both for the patient
and the healthcare system.
The Company believes that its marketing goals are best served by
forming partnerships with key customers to develop concepts for future products
and technology applications. These partnerships facilitate close customer
interaction, including product strategy sessions.
Marketing utilizes its strong industry contacts, plus key customer
focus sessions, to identify new product and other opportunities. Through the use
of cross-functional teams that include marketing, research and development and
manufacturing personnel, marketing guides the development process to meet
customers' needs with products that are easier to use, require less technical
expertise, and yield faster results--often in minutes or hours rather than days.
Changes in the healthcare delivery system have resulted in major
consolidation among reference laboratories and the formation of multi-hospital
alliances. The Company has structured its marketing, selling and customer
service to anticipate and respond to these changes. This involved the addition
of sales and marketing personnel; the expansion of technical services staff to
support the Company's customers and distribution network through a toll-free
service hotline; and the implementation of major marketing programs to target
key customers.
The Company markets products through direct sales forces, both
domestically and in Italy, and national and international independent
distributors. In the United States, the Company's direct sales force consists of
a director of sales, three regional sales managers, three regional product
specialists and 20 technical sales representatives. Where the Company utilizes
distributors, the Company participates in selling efforts involving key
customers. In Italy, the Company's direct sales force consists of a director of
sales, two product specialists and six technical sales representatives, as well
as an international sales manager who is responsible for all distributor
activities outside of Italy.
The Company's sales and marketing efforts in Europe, North Africa and
the Middle East are managed through MDE's European headquarters in Milan, Italy.
MDE's strategy has been to appoint one or two distributors in each of the
countries in its targeted markets, and to maintain a direct sales organization
within Italy. The Company has approximately 50 independent distributors in
approximately 50 foreign countries. The Company has additional key distributor
relationships in Canada, Latin America and the Pacific Rim, which relationships
are managed directly from the United States.
RESEARCH AND DEVELOPMENT
The Company's research and development activities focus on developing
new and improved diagnostic solutions. Working in conjunction with the marketing
department, the
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Company's research and development department focuses its activities on
enhancements to and new applications for the Company's technologies. Over the
past six years Meridian has developed internally 23 new products. The research
and development department has access to a number of diagnostic technologies,
each of which can be applied to meet new product specifications that marketing
has established. The Company's product development staff are experts in binding
various biological materials to numerous solid phases, including plastics,
membranes, latex beads, immuno-fluorescent dyes and immunogold to develop
testing formats. The Company believes that its proprietary know-how and
technologies in these areas enable it to develop products that have longer
shelf-lives and provide improved performance and quicker test results.
The research and development department initiates the Company's quality
process through its technology transfer mechanism which begins the establishment
of manufacturing standards. By working closely with the manufacturing
department, the same standards can be imposed to ensure consistently
high-quality products. The Company estimates that it takes approximately 18 to
24 months from the conceptualization of a product to its marketing.
The research and development department includes the Vice President of
Research and Development and 15 research scientists. The disciplines represented
in the group include biochemistry, immunology, mycology, bacteriology, virology
and parasitology. In fiscal 1994, fiscal 1995 and fiscal 1996, the Company spent
$1,433,000, $1,432,000 and $1,499,000, respectively, on its research and
development activities.
CUSTOMERS
The principal customers for the Company's products are hospitals,
commercial and reference laboratories, alternate site markets, such as
physicians' offices, outpatient clinics, nursing homes and HMOs, and new
markets, such as veterinary laboratories, water treatment facilities and
consumer self-testing. No end-use customer comprised more than 5% of the
Company's sales in fiscal 1996. Two distributors together accounted for
approximately 38% of the Company's fiscal 1996 sales. However, the Company does
not believe that the loss of either of these distributors would have a material
adverse effect on the Company because of its ability to sell to the end-use
customers served by these distributors through alternative means.
MANUFACTURING
The Company's manufacturing is performed at its Cincinnati, Ohio
facility. All manufacturing operations are regulated by, and in compliance with,
FDA-mandated Good Manufacturing Practices for medical devices. To maintain the
highest quality standards, the Company utilizes both external and internal
quality auditors who routinely evaluate the Company's manufacturing processes.
The Company's immunodiagnostic products require the production of highly
specific and sensitive antigens and antibodies. The Company produces
substantially all of its own requirements including: monoclonal antibodies,
polyclonal antibodies, synthetic peptides, plus a variety of fungal, bacterial
and viral antigens. For the majority of its raw materials acquired from third
parties, the Company has developed dual
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sources. As a result, the Company believes it has access to sufficient raw
materials for its products. The Company believes it has sufficient manufacturing
capacity for anticipated growth.
COMPETITION
The market for diagnostic tests is a multi-billion dollar international
industry which is highly competitive. Many of the Company's competitors are
larger with greater financial, research, manufacturing, and marketing resources.
Important competitive factors of the Company's products include product quality,
price, ease of use, customer service and reputation. In a broader sense,
industry competition is based upon scientific and technological capability,
proprietary know-how, access to adequate capital, the ability to develop and
market products and processes, the ability to attract and retain qualified
personnel and the availability of patent protection. To the extent that the
Company's product lines do not reflect technological advances, the Company's
ability to compete in those product lines could be adversely affected.
Companies competing in the diagnostic test industry generally focus on
a limited number of tests or limited segments of the market. As a result, the
diagnostic test industry is highly fragmented and segmented. Hundreds of
companies in the United States alone supply immunodiagnostic tests. These
companies range from multi-national healthcare companies, for which
immunodiagnostics is one line of business, to small start-up companies. Of
central importance in the industry are mid-sized medical diagnostic specialty
companies, like the Company, that offer multiple, broad product lines and have
the ability to deliver high value new products quickly to the marketplace. Among
the companies with which the Company competes in the marketing of one or more of
its products are Abbott Laboratories Inc., Becton, Dickinson and Company,
Diagnostic Products Corporation, QUIDEL Corporation and the Wampole Laboratories
Division of Carter-Wallace, Inc.
INTELLECTUAL PROPERTY, PATENTS AND LICENSES
The Company typically does not seek patent protection for its products
and instead strives to maintain the confidentiality of its proprietary know-how.
The Company owns or licenses U.S. and foreign patents for 20 of its products.
The patents or licenses thereof for these products were acquired in connection
with the purchase of the products or the licensing of the technology on which
the products are based. In the absence of patent protection, the Company may be
vulnerable to competitors who successfully replicate the Company's production
and manufacturing techniques and processes. The Company's laboratory and
research personnel are required to execute confidentiality agreements designed
to protect the Company's proprietary products.
The Company has no reason to believe that its products and proprietary
rights infringe the proprietary rights of any third parties. There can be no
assurance, however, that third parties will not assert infringement claims in
the future.
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GOVERNMENT REGULATION
FDA REGULATION OF MEDICAL DEVICES. The Company's products are regulated
by the Food & Drug Administration ("FDA") as "devices" pursuant to the Federal
Food, Drug and Cosmetic Act (the "FDCA"). Under the FDCA, medical devices are
classified into one of three classes (i.e., Class I, II or III). Class I and II
devices are not expressly approved by the FDA, but, instead, are "cleared" for
marketing. Class III devices generally must receive "pre-market approval" from
the FDA as to safety and effectiveness.
A 510(k) clearance will be granted if the submitted data establishes
that the proposed device is "substantially equivalent" to an existing Class I or
Class II medical device or to a Class III medical device for which the FDA has
not required pre-market approval. The 510(k) clearance process for
"substantially equivalent" devices allows product sales to be made after the
filing of an application and upon acknowledgment by the FDA, typically within 90
to 120 days after submission. If the FDA requests additional information, the
product cannot be sold until the application has been supplemented and upon
acknowledgment by the FDA within 90 to 120 days of the supplemental application.
If there are no existing FDA-approved products or processes comparable to a
diagnostic product or process, approval by the FDA involves the more lengthy
pre-market approval procedures.
Each of the products currently marketed by the Company has been cleared
by the FDA pursuant to the 510(k) clearance process or is exempt from such
requirements. The Company believes that most, but not all, products under
development will be classified as Class I or II medical devices and will be
eligible for 510(k) clearance. One example of a product in development that is
subject to the FDA's more lengthy pre-market approval process is the adaption of
the Company's rapid diagnostic test for urinary tract infections to the consumer
market.
OTHER MEDICAL DEVICE REGULATION. Sales of the Company's products in
foreign countries are subject to foreign government regulation, the requirements
of which vary substantially from country to country. The time required to obtain
approval by a foreign country may be longer or shorter than that required for
FDA approval, and the requirements may differ. The Company is currently pursuing
approvals for its Premier EHEC and Premier Rotaclone products with the
Paul-Ehrlich Institute in Germany and is supporting a number of foreign product
registrations via its international distributors.
OTHER APPROVALS. The Company intends to seek appropriate certifications
and approvals from the Association of Analytical Chemists and the United States
Department of Agriculture to enable the Company to market an immunodiagnostic
test for toxigenic E. coli in both food products and animals. The Company has no
direct experience in obtaining these certifications and approvals, but the
Company believes the time required and applicable procedures will be similar to
those required for FDA approval. However, there is no assurance that the Company
will receive these certifications and approvals.
14
15
The Clinical Laboratory Improvement Act of 1988 prohibits laboratories
from performing in vitro tests for the purpose of providing information for the
diagnosis, prevention or treatment of any disease or impairment of, or the
assessment of, the health of human beings unless there is in effect for such
laboratories a certificate issued by the U.S. Department of Health and Human
Services applicable to the category of examination or procedure performed.
The Company is an exempt small quantity generator of hazardous waste
and has a U.S. Environmental Protection Agency identification number. All
hazardous waste is manifested and disposed of properly. The Company is in
compliance with the applicable portions of the Federal and state hazardous waste
regulations and has never been a party to any environmental proceeding.
EMPLOYEES
As of November 15, 1996, the Company had 180 full-time employees,
including 52 in sales, marketing and technical support, 75 in manufacturing, 19
in research and product development and 36 in administration and finance.
Sixty-nine of the Company's employees hold scientific degrees.
The Company maintains a Savings and Investment Plan for its U.S.
employees and has established stock option plans for its officers, directors and
employees.
None of the Company's employees is represented by a labor organization
and the Company is not a party to any collective bargaining agreement. The
Company has never experienced any strike or work stoppage and considers its
relationship with its employees to be excellent.
ITEM 2.
PROPERTIES
The Company's corporate offices, manufacturing facility and research
and development facility are located in two buildings totaling 75,000 square
feet on 4.1 acres of land in a suburb of Cincinnati. These properties are owned
by the Company. The Company believes these facilities are in good condition,
well maintained and suitable for its long-term needs.
The Company completed construction of a new warehouse in October 1994
and additional manufacturing and administrative space in September 1995.
In October 1995, the Company commenced renovation of its former
administrative offices and laboratory manufacturing space. This phase, which
cost approximately $1.6 million, was completed in December 1996.
15
16
The Company believes its manufacturing and laboratory facilities are in
compliance with all applicable rules and regulations and are maintained in a
manner consistent with FDA- mandated Good Manufacturing Practices.
MDE conducts its operations in a two-story building in the Milan, Italy
area consisting of approximately 18,000 square feet. This facility is owned by
MDE. The Company believes these facilities are in good condition, well
maintained and suitable for MDE's long-term operations.
ITEM 3.
LEGAL PROCEEDINGS
Meridian is a defendant in a civil action filed by Delta Biologicals, s.r.l.
("Delta") against Inova Diagnostics, Inc. ("Inova") and Meridian in the Circuit
Court of the Eleventh Judicial Circuit, Dade County, Florida, Case No. 95-12955,
in June, 1995. In July 1995, this case was removed to the United States District
Court for the Southern District of Florida, Miami Division, and assigned Case
No. 95-1604-CIV.
In its Complaint, Delta, an Italian corporation, alleges that it has a
contract with Inova which grants it an exclusive right to import, market and
sell products manufactured by Inova in Italy, Spain, France and Portugal and
that Inova has breached that contract by entering into a contract with, and
selling products to, Meridian, which, through its subsidiary Meridian
Diagnostics Europe, s.r.l. ("MDE"), is selling some of these same products in
Italy in violation of Delta's claimed exclusive rights. Delta further alleges
that Meridian deliberately and knowingly tortiously interfered in the
contractual relationship between Delta and Inova.
Delta seeks judgment against Meridian of compensatory and punitive
damages in unspecified amounts in excess of $15,000. Since the filing of the
initial complaint, MDE has also been named as a defendant. The allegations and
prayer for damages against MDE are the same as those alleged against Meridian.
Defendants Inova, Meridian and MDE have filed answers denying any liabilities to
Delta, and Inova has filed a counterclaim against Delta seeking a variety of
damages totaling in excess of $400,000.
Meridian and MDE have an agreement with Inova which obligates Inova to
defend and indemnify them against Delta's claims up to a limit of $300,000.
Discovery is at a very early stage and, therefore, management is not able to
opine on the merits or possible outcome of this litigation. Nevertheless, based
upon management's knowledge and the opinion of outside counsel, management
believes that both Meridian and MDE have meritorious defenses and that Inova is
obligated to defend and indemnify them. Accordingly, management believes that
the ultimate resolution of the pending litigation will not have a material
adverse effect on Meridian's financial condition, results of operations or cash
flows.
Management is not aware of any other pending or threatened litigation,
claims or assessments, asserted or unasserted, against Meridian.
16
17
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1996.
PART II.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
"Common Stock Information" on page 24 and "Quarterly Financial Data" on
page 9 of the Registrant's Annual Report to Shareholders for 1996 are
incorporated herein by reference. There are currently no restrictions on cash
dividend payments.
The Company follows a cash dividend policy consisting of regular
quarterly dividends and special year-end dividends. The Board has set a targeted
payout ratio of 45% to 55% of annual net earnings. Approximately 30% to 35% of
forecasted annual net earnings is intended to be paid in regular quarterly
dividends with any balance being paid as a year-end special dividend. All or a
portion of the year-end dividend may be paid in stock. The declaration and
amount of dividends are determined by the Board of Directors in its discretion
based upon its evaluation of earnings, cash flow requirements and future
business developments. There is no assurance that dividends will continue.
On January 25, 1996, the Company increased its quarterly dividend rate
from $0.0267 to $0.035 per share. The Company paid a dividend of $0.035 per
share for each quarter of fiscal 1996. On November 18, 1996, the Company paid a
special fiscal 1996 year-end dividend of $0.025 per share payable December 6,
1996 to shareholders of record on November 28, 1996. Also, on November 18, 1996,
the Board approved an increase in the regular quarterly dividend rate from
$0.035 to $0.0425 per share.
The Company paid a $0.02 per share dividend in the first quarter of
fiscal 1995 and a $0.0267 per share dividend for each other quarter of fiscal
1995. In addition, the Company paid a three-for-two stock split on October 2,
1995. On December 1, 1995, the Company also paid a special fiscal 1995 year-end
dividend of $0.025 per share.
17
18
ITEM 6.
SELECTED FINANCIAL DATA
"Ten Year Summary" on page 23 of the Registrant's Annual Report to
Shareholders for 1996 is incorporated herein by reference. Long-term
obligations, including current maturities, are as follows:
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
$23,163,313 $12,881,086 $15,051,338 $12,811,558 $ 1,807,647
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing on page 10 of the Registrant's Annual Report
to Shareholders for 1996 is incorporated herein by reference.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
"Quarterly Financial Data" on page 9 of the Registrant's Annual Report
along with the Consolidated Financial Statements of the Registrant shown on
pages 13 through 22 of its Annual Report to Shareholders for 1996, are
incorporated herein by reference:
Consolidated Balance Sheets as of September 30, 1996 and 1995.
Consolidated Statements of Earnings for the years ended September 30,
1996, 1995 and 1994.
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended September 30,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
The following schedules are filed herewith:
18
19
Schedule
No. Description Page
-------- ----------- ----
Report of Independent Public Accountants. 23
II. Valuation and Qualifying Accounts for the years ended
September 30, 1996, 1995 and 1994. 24
All other supplemental schedules are omitted due to the absence of
conditions under which they are required or because the information is shown in
the Consolidated Financial Statements or Notes thereto.
ITEM 9.
DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Items 10., 11., 12., and 13. of Part III are incorporated by reference
to the Registrant's Proxy Statement for its 1997 Annual Shareholders' Meeting to
be filed with the Commission pursuant to Regulation 14A.
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) FINANCIAL STATEMENTS AND SCHEDULES.
All financial statements and schedules required to be filed by Item 8
of this Form and included in this report have been listed previously under Item
8. No additional financial statements or schedules are being filed since the
requirements of paragraph (d) under Item 14 are not applicable to the Company.
(a) (3) EXHIBITS.
Exhibit Number Description of Exhibit Filing Status
-------------- ---------------------- -------------
3.1 Articles of Incorporation, including a
amendments
3.2 Code of Regulations b
19
20
4 Indenture between the Company and Star Bank, c
National Association, as Trustee, relating to the
Company's 7% Convertible Subordinated
Debentures due 2006
10.1 First Refusal Agreement b
10.2 Amendment to the First Refusal Agreement d
10.3 License Agreement dated October 6, 1983 with b
Marion Laboratories, Inc.
10.5 Sublicense Agreement dated June 17, 1993 e
among Johnson & Johnson, the Scripps
Research Institute and the Company
Concerning certain Patent Rights
10.6 Assignment dated June 17, 1993 from Ortho e
Diagnostic Systems Inc. to the Company
concerning certain Patent Rights
10.7 Agreement dated January 24, 1994 between f
Meridian Diagnostics, Inc. and Immulok, Inc.
10.8 Asset Purchase Agreement dated June 24, 1996 g
between Cambridge Biotech Corporation and
Meridian Diagnostics, Inc.
MANAGEMENT COMPENSATORY CONTRACTS:
10.9 Savings and Investment Plan, as amended h
10.10 Savings and Investment Plan Trust i
10.11 1986 Stock Option Plan j
10.12 1990 Directors' Stock Option Plan k
10.13 1994 Directors' Stock Option Plan l
10.14 1996 Stock Option Plan Filed herewith
10.15 Salary Continuation Agreement for John A. m
Kraeutler
11 Statement re Computation of Per Share Filed herewith
Earnings
13 1996 Annual Report to Shareholders Filed herewith (1)
21 Subsidiaries of the Registrant i
23 Consent of Independent Public Accountants Filed herewith
27 Financial Data Schedule Filed herewith
- ------------
(1) Only portions of the 1996 Annual Report to Shareholders specifically
incorporated by reference in this Form 10-K are filed herewith. A supplemental
paper copy of the 1996 Annual Report to Shareholders has been provided to the
Securities and Exchange Commission for informational purposes only.
20
21
Incorporated by reference to:
a. Registration Statement No. 333-02613 on Form S-3 filed with the
Securities and Exchange Commission on April 18, 1996.
b. Registration Statement No. 33-6052 filed under the Securities Act of
1933.
c. Registration Statement No. 333-11077 on Form S-3 filed with the
Securities and Exchange Commission on August 29, 1996.
d. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1992.
e. The Company's Form 8-K filed with the Securities and Exchange
Commission on June 17, 1993.
f. The Company's Forms 8-K filed with the Securities and Exchange
Commission on February 8, 1994 and April 6, 1994.
g. The Company's Form 8-K filed with the Securities and Exchange
Commission on July 2, 1996.
h. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1994 and to Registration Statement No. 33-65443 on Form
S-8 filed with the Securities and Exchange Commission on December 28,
1995.
i. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1994.
j. Registration Statement No. 33-89214 on Form S-8 filed with the
Securities and Exchange Commission on April 5, 1995.
k. Registration Statement No. 33-38488 on Form S-8 filed with the
Securities and Exchange Commission on December 28, 1990.
l. Registration Statement No. 33-78868 on Form S-8 filed with the
Securities and Exchange Commission on May 12, 1994.
m. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1995.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal
year.
21
22
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MERIDIAN DIAGNOSTICS, INC.
By: William J. Motto
-------------------------------
Date: December 26, 1996 William J. Motto
Chairman of the Board
of Directors and Chief Executive
Officer (Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
William J. Motto Chairman of the Board of December 26,1996
- ---------------------------- Directors and Chief Executive
William J. Motto Officer (Principal Executive
Officer)
Gerard Blain Vice President, Secretary and December 26,1996
- ---------------------------- Chief Financial Officer
Gerard Blain (Principal Financial Officer and
Principal Accounting Officer)
James A. Buzard Director December 26,1996
- ----------------------------
James A. Buzard
Gary P. Kreider Director December 26,1996
- ----------------------------
Gary P. Kreider
Robert J. Ready Director December 26,1996
- ----------------------------
Robert J. Ready
Jerry L. Ruyan Director December 26, 1996
- ----------------------------
Jerry L. Ruyan
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23
Report of Independent Public Accountants
To Meridian Diagnostics, Inc:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Meridian Diagnostics, Inc. and
subsidiaries' annual report to shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated November 7, 1996. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in the accompanying index is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
November 7, 1996
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SCHEDULE II
Meridian Diagnostics, Inc.
and Subsidiaries
Valuation and Qualifying Accounts
Years Ended September 30, 1996, 1995 and 1994
Balance
Balance at Charged to Charged at End
Beginning Costs and to Other of
Description of Period Expenses Accounts Deductions Period
- -----------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1996:
- -----------------------------
Allowance for Doubtful Accounts $ 164,136 $ (19,506) $ 6,419 $ (23,036) $ 128,013
Year Ended September 30, 1995:
- -----------------------------
Allowance for Doubtful Accounts $ 113,183 $ 122,526 $ 4,677 $ (76,250) $ 164,136
Year Ended September 30, 1994:
- -----------------------------
Allowance for Doubtful Accounts $ 41,424 $ 74,824 $ 1,523 $ (4,588) $ 113,183
24