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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, 1997.
[ ] 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
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X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.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 $90,046,000
based on a closing sale price of $10.00 per share on December 12, 1997. As of
December 12, 1997, 14,371,932 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 1997 furnished to
the Commission pursuant to Rule 14a-3(b) and portions of the Registrant's Proxy
Statement filed with the Commission for its 1998 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 16
Item 3 - Legal Proceedings 16
Item 4 - Submission of Matters to a Vote of Security Holders 16
Part II
Item 5 - Market for Registrant's Common Equity
and Related Stockholder Matters 17
Item 6 - Selected Financial Data 17
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
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GENERAL
The Company develops, manufactures and markets a broad range of
innovative, disposable diagnostic test kits and related diagnostic products used
for the rapid diagnosis of infectious diseases. These products provide accuracy,
simplicity, and speed, and enable early diagnosis and treatment of common
medical conditions such as gastrointestinal, urinary tract and respiratory
infections. All of the Company's products are used in procedures performed in
vitro (outside the body) and enhance patient well-being while reducing total
outcome costs of healthcare.
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 60
countries were 29% of total fiscal 1997 sales, with about 67% of international
sales originating in Western Europe. The majority of the remaining international
sales were to 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
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product lines in fiscal 1993 and 1994 respectively from Johnson & Johnson for
approximately $3.4 million each, the June 1996 acquisition of the enteric
product line of Cambridge Biotech Corporation for approximately $6.6 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(R),
Rotaclone(R), Cytoclone(TM) and a product for the detection of Lyme disease.
Along with the Company's Meritec(TM) and ImmunoCard(R) 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 $6,566,000 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
$5,336,000. The Company also assumed certain royalty obligations of Cambridge
Biotech Corporation.
The acquired products are being 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 74% of the acquired products were sold in the U.S. during 1997.
IMMUNODIAGNOSTICS OVERVIEW
In vitro diagnostic testing is the process of analyzing constituents of
blood, urine, stool, other body 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.
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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 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
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accuracy, simplicity, speed and cost-efficiency. The Company
accomplishes this by monitoring existing markets, interacting
closely with its customers and recognizing emerging diseases
and therapies. Since 1991, the Company has developed and
introduced 25 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 developed a strong 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 five years, the
Company's international sales have grown from $2.1 million in
fiscal 1992 to $10.3 million in fiscal 1997 and represented
29% of total consolidated sales in fiscal 1997.
- 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. During
1997 several additional exclusive three-year contracts were
signed with other consolidated healthcare providers.
- 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
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for toxigenic E. coli, a bacteria found in inadequately cooked
meats as well as many other food products. In August 1997, the
Company announced the launch of a rapid test for the detection
of E. coli O157:H7 in food, co-developed with a major U.S.
research center. 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.
- 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 September
1997, the Company entered into an exclusive distribution
agreement with a third party which through its representatives
will distribute the Company's urinary tract infection product,
as well as other rapid tests, 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(R) and
Monolert(TM) -- 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(R) 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 specimen containing the complementary
antigen or antibody. This technology is rapid and economical and is used in the
Company's Meritec(TM), MeriStar(R) and MonoSpot(R) products.
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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(R) 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(R) and Macro-CON(R).
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 products to diagnose
gastrointestinal and parasitic diseases. The Company's products generally range
in list price from $1 per test to $25 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(R), Premier, Products for the diagnosis and collection,
- - Amebiasis Para-Pak ULTRA, Para-Pak PLUS, preservation, transportation and concentration
- - Lyme Disease Macro-CON, Merifluor(R) of parasites.
- ------------------------------------- --------------------------------------- ----------------------------------------------------
GASTROINTESTINAL DISEASES
- - Stomach Ulcers (H. pylori) Premier, ImmunoCard(R), U.S. patients make 20 million annual visits to
Premier Platinum(R) 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
ImmunoCard STAT!(TM) infects undercooked food and can cause kidney
failure.
- - Antibiotic-associated Diarrhea Premier,ImmunoCard(R), Toxin producing strains of C. difficile can cause
(C.difficile) Meritec(TM), Cytoclone PMC (pseudomembranous colitis) that results
in rapid colon degeneration.
- - Pediatric Diarrhea (Rotavirus, ImmunoCard(R), Meritec(TM), These viral diseases, which cause rapid
Adenovirus) Rotaclone(R), Adenoclone(R) dehydration, are transmitted rapidly through
ImmunoCard STAT!(TM) pediatric populations in hospitals, schools
and daycare settings.
- ------------------------------------- --------------------------------------- ----------------------------------------------------
RESPIRATORY DISEASES
- - Pneumonia (Mycoplasma ImmunoCard(R), MeriStar(R) Pneumonia is the fifth leading cause of death
pneumoniae) worldwide, 20% of which is caused by
Mycoplasma pneumoniae
- - Valley Fever (Coccidioides immitis) Premier 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(R) In the U.S., 65 million cultures are performed
yearly to detect potential urinary tract infection.
- - Chlamydia Premier, Merifluor(R) Chlamydia is the leading sexually transmitted
disease.
- ------------------------------------- --------------------------------------- ----------------------------------------------------
VIRAL DISEASES
- - Infectious Mononucleosis ImmunoCard(R),Monolert(TM), Infectious mononucleosis, a viral disease common
MonoSpot(R) Latex, 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 and can be
life-threatening to newborns.
- - Cytomegalovirus Merifluor(R) Cytomegalovirus infections are potentially
deadly in transplant procedures and among
immunocomprised blood recipients.
- - Varicella-Zoster virus Merifluor(R) Varicella-Zoster virus is the cause of chicken
pox and shingles.
- ------------------------------------- --------------------------------------- ----------------------------------------------------
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COMPETITIVE ADVANTAGE MARKET
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- ---------------------------------------------------------------------- --------------------------------------------
Leading supplier of parasitology diagnostics. In October 1995, - Hospital Laboratories
introduced two products that resulted in easier processing, safer - Reference Laboratories
handling and reduced procecessing time of the specimen and lower - Veterinary Laboratories
cost disposal of transport container.
- ---------------------------------------------------------------------- --------------------------------------------
Historically, a physician-performed endoscopy, an extremely - Hospital Laboratories
uncomfortable and expensive procedure, was employed to diagnose - Reference Laboratories
gastric distress. The Company's tests allow accurate, quick diagnoses - Veterinary Laboratories
utilizing patient blood serum. The Company is the only manufacturer - State Health Laboratories
to provide testing formats which accommodate both small 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 - Hospital Laboratories
detecting respiratory diseases. The product is a rapid test - Reference Laboratories
providing results in only ten minutes. The product provides - State Health Laboratories
increased accuracy over common diagnostic methods, allowing for a - Veterinary Laboratories
safer, more effective treatment.
- ---------------------------------------------------------------------- --------------------------------------------
The product allows for rapid screening for the presence of urinary - Hospital Laboratories
tract infection. Therapy can be rapidly administered, often while - References Laboratories
the patient is still in the physicians 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 - Hospital Laboratories
including Monolert(TM) which use synthetic peptides to detect - Reference Laboratories
the virus which causes mononucleosis. - 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.
Quickly detects the virus that causes chicken pox 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 and co-marketing programs.
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 national sales manager, three regional sales managers, two inside sales
representatives 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 European
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 about 60 independent distributors in approximately
60 foreign countries including key distributor relationships in Canada, Central
and South America, Mexico, Australia, New Zealand and the Pacific Rim, which are
managed directly from the United States by an international manager.
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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 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 25 new
products. At present, patents are pending on two recent additions to our product
line. 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 1995, fiscal 1996 and fiscal 1997, the Company spent
$1,432,000, $1,499,000 and $1,502,000, 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 1997. Two distributors together accounted for
approximately 33% of the Company's fiscal 1997 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
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production of highly specific and sensitive antigens and antibodies. The Company
produces substantially all of its own requirements including: monoclonal
antibodies, polyclonal antibodies, 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 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 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 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.
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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.
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.
In practice, the FDA has been granting clearance in about 30 days following
submission of the supplemental information. 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.
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. Currently, the Company is
supporting foreign product registrations in Japan for its ImmunoCard products
via a Japanese distributor.
Other Approvals. The Company intends to seek appropriate certifications
and approvals to enable the Company to market immunodiagnostic tests for
toxigenic E. coli and E coli O157:H7 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.
Although these certificates are required only for the Company's laboratory
customers (but not for the Company itself) the Company considers the
requirements of The Clinical Laboratory Improvement Act of 1988 in the design
and development of its products.
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, 1997, the Company had 181 full-time employees,
including 49 in sales, marketing and technical support, 88 in manufacturing, 15
in research and product development and 29 in administration and finance.
Sixty-eight 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. A stock purchase plan was established on October 1, 1997 for all
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.
THE YEAR 2000 ISSUE
The Company completed a major upgrade of its computer hardware and
software applications in November 1997 and believes its internal systems are
year 2000 compliant. The Company has also been assured by its primary commercial
bank of compliance with the year 2000.
The Company has transactions with over 2500 customers and several
hundred suppliers. While there has been activity to date with customers who
interact electronically, it is not feasible to state that all of the above are,
or will be, in compliance with the year 2000 issue. The Company has initiated an
internal effort to assess this situation regarding the external contacts,
however, does not believe that the year 2000 will have a material impact on the
Company.
15
16
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.
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
-----------------
Management is not aware of any pending or threatened litigation, claims
or assessments, asserted or unasserted, against Meridian.
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 1997.
16
17
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 1997 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 23, 1997, the Company increased its quarterly dividend rate
from $0.035 to $0.0425 per share. The Company paid a dividend of $0.0425 per
share for each quarter of fiscal 1997. On November 19, 1997, the Company
declared a special fiscal 1997 year-end dividend of $0.025 per share payable
December 8, 1997 to shareholders of record on November 28, 1997. Also, on
November 19, 1997, the Board stated its intention to increase the regular
quarterly dividend rate from $0.0425 to $0.0500 per share for fiscal year 1998.
The Company paid a $0.0267 per share dividend in the first quarter of
fiscal 1996 and a $0.035 per share dividend for each other quarter of fiscal
1996. On December 6, 1996, the Company also paid a special fiscal 1996 year-end
dividend of $0.025 per share.
ITEM 6.
SELECTED FINANCIAL DATA
-----------------------
"Ten Year Summary" on page 23 of the Registrant's Annual Report to
Shareholders for 1997 is incorporated by reference. Long-term obligations,
including current maturities, are as follows:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
$20,581,193 $20,722,700 $12,881,086 $15,051,338 $12,811,558
17
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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 1997 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 1997, are
incorporated herein by reference:
Consolidated Balance Sheets as of September 30, 1997 and 1996.
Consolidated Statements of Earnings for the years ended September 30,
1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended September 30,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
The following schedules are filed herewith:
Schedule
No. Description Page
--- ----------- ----
Report of Independent Public Accountants. 24
II. Valuation and Qualifying Accounts for the years ended
September 30, 1997, 1996 and 1995. 25
18
19
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 1998 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
4 Indenture between the Company and Star c
Bank, 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 b
with Marion Laboratories, Inc.
19
20
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 e
Ortho 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, g
1996 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 n
10.15 Salary Continuation Agreement for John A. m
Kraeutler
11 Statement re Computation of Per Share Filed herewith
Earnings
13 1997 Annual Report to Shareholders Filed herewith (1)
21 Subsidiaries of the Registrant Filed herewith
23 Consent of Independent Public Filed herewith
Accountants
27 Financial Data Schedule Filed herewith
99 Forward Looking Statements Statement Filed herewith
- -------------
(1) Only portions of the 1997 Annual Report to Shareholders specifically
incorporated by reference in this Form 10-K are filed herewith. A supplemental
paper copy of the 1997 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.
n. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1996.
(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: /s/ WILLIAM J. MOTTO
------------------------------------
Date: December 29, 1997 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
--------- -------- ----
/s/ WILLIAM J. MOTTO Chairman of the Board of December 29, 1997
- ---------------------------------- Directors and Chief Executive
William J. Motto Officer (Principal Executive
Officer)
/s/ J0HN A. KRAEUTLER President and Chief Operating December 29, 1997
- ---------------------------------- Officer, Director
John A. Kraeutler
/s/ GERARD BLAIN Vice President, Secretary and December 29, 1997
- ---------------------------------- Chief Financial Officer
Gerard Blain (Principal Financial Officer and
Principal Accounting Officer)
/s/ JAMES A. BUZARD Director December 29, 1997
- ----------------------------------
James A. Buzard
/s/ GARY P. KREIDER Director December 29, 1997
- ----------------------------------
Gary P. Kreider
22
23
- ----------------------------------
Robert J. Ready Director December 29, 1997
Director December 29, 1997
- ----------------------------------
Jerry L. Ruyan
23
24
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, 1997. 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, 1997
24
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SCHEDULE II
Meridian Diagnostics, Inc.
and Subsidiaries
Valuation and Qualifying Accounts
Years Ended September 30, 1997, 1996 and 1995
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, 1997:
- ------------------------------
Allowance for Doubtful Accounts $ 128,013 $ 68,489 $ 2,135 $ (31,895) $ 166,742
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
25